The mutual holding company concept is fundamentally flawed.
If the implications of the type of reorganization were disclosed, most
mutual policyowners would vote against the reorganization. On the other
hand, if safeguards not contemplated in the proposed bill were instituted,
prospective shareholders would be reluctant to invest in the reorganized
enterprise.

 Joseph M. Belth
Emeritus Professor of
Insurance
Indiana University

The Feelings
Not Mutual:

An Analysis of Governor Patakis Proposed Mutual
Holding Company Legislation

On behalf of the members of the Assembly Insurance Committee, I am pleased
to submit our report on Mutual Holding Company (MHC) legislation.

As you know, the Committee was under considerable pressure last session to
hastily enact the MHC legislation (A.7057-A/S.5628)
proposed by Governor Pataki last June. At your direction, we deferred action
on this complex bill because of our concern about its impact on the interests
of millions of policyholders in New York and across the nation, and solicited
public comment at hearings this past fall in New York City and Albany. In contrast
to the Pataki Administration, which failed to solicit meaningful input from
consumer advocates and instead crafted the bill behind closed doors with the
mutual life insurance industry, the Committee, through the public hearing process,
solicited comment from a wide variety of interest groups.

The hearings were well attended, lively and thought-provoking. Over 30 witnesses
testified  including mutual insurance company CEOs, state regulators,
legal specialists, journalists, scholars and representatives of New York State
and national consumer organizations  during 12 hours of proceedings. An
equal number of witnesses submitted written testimony and Committee staff has
done extensive additional research.

As a result of the Committees hearings and ongoing review, considerable
light has been shed on the many complex issues raised by this proposal and there
are a substantial number of concerns that we feel must be addressed before the
legislation can be considered. This report summarizes the testimony and written
submissions we received, focuses on a number of key points and sets out an extensive
series of recommendations which we hope will provide guidance for the Assembly
Majority in considering the wisdom of adopting mutual holding company legislation
this session.

In closing I would like to personally thank you for your support on this matter,
and to commend the excellent work of Committee and your Program and Counsel
staff in analyzing this complex legislation and cogently laying out the issues
that must be addressed

In preparing this report, the Committee relied on oral and written testimony
from the public hearings, conducted interviews with interested parties, and
reviewed a large volume of additional submissions, legal and scholarly articles,
media reports, federal and state laws, and other materials related to mutual
holding company conversions and demutualizations. Statements from witnesses
appearing at the hearings, when used in this report, may have been edited for
the sake of clarity, but every effort was made to preserve each speakers
intended meaning. Committee Executive Director Peter Newell was the principal
author of this report and the Committee would also like to acknowledge the excellent
editorial and production support we received in preparing this report from Deborah
J. Hicks, Eleanor M. Wilson and Barry W. Mack. This report can be accessed on
the Assemblys Home Page (http://assembly.state.ny.us.).

The life insurance industry approached the Committee during the 1997 Legislative
Session and requested that it consider legislation authorizing mutual life insurers
to reorganize as stock companies through the creation of upstream Mutual Holding
Companies (MHCs). Under the proposal, the reorganized company could sell up
to 49% of the stock in the converted life insurer to the public, while policyholders'
membership rights would be transferred to the MHC, and contractual rights to
the new stock life insurer. In late June of 1997, Governor Pataki submitted
a Governor's Program Bill to authorize MHCs (A.7057-A/Grannis).
Sixteen states and the District of Columbia have enacted some form of MHC legislation
within the last two years. Four insurers have reorganized in the MHCs structure.

Rather than act precipitously on the complex legislation, the Committee deferred
action during the 1997 session, and instead held public hearings in New York
City and Albany in the fall. The hearings were lively, well-attended and thought-provoking,
as life company executives, legal specialists, consumer advocates, state regulators,
journalists and elected officials debated the merits of the bill. Since the
introduction of the bill, two major mutual life insurers, Mutual of New York
(MONY) and Prudential, have announced plans to pursue full demutualizations.

Proponents of the legislation said it is needed to give mutual life insurers
greater organizational flexibility and ready access to capital in an era of
consolidation and increasing competition from banks, mutual funds and other
sectors of the financial services industry. Supporters of the bill maintain
that: 1) policyholders' membership and contractual rights would be preserved
under the MHC structure; 2) policyholders would benefit from the improved financial
strength of the companies that issued their policies; and 3) policyholders would
receive enhanced value in the form of subscription rights to purchase stock,
and potentially higher dividends and a distribution of stock of greater value
than at present in the event of a full demutualization in the future.

Opponents argue that mutual life insurers have adequate access to capital under
current law, particularly under one of the four methods set out in statute to
demutualize. Some opponents saw the MHC legislation as little more than a scheme
for management self-enrichment. Opponents of the legislation also argued that
the MHC legislation: 1) did not provide for adequate disclosure or participation
by policyholders; 2) diminished mutual policyholders' membership interests without
adequate compensation; 3) exposed policyholders to considerable risk; and 4)
would result in a weakened regulatory regimen.

Based on the written and oral testimony presented at the hearing and extensive
research, a number of problem areas with the proposed legislation are identified
and this report offers an extensive series of findings and recommendations on
the issue of MHC in general and the Governor's proposed legislation:

Policyholders are the owners of mutual life insurers and should be treated
as such in the MHC process;

Full demutualization either under current law or a modified statute has
not been sufficiently explored by either the mutual insurance industry or
the Pataki Administration as an alternative to MHC legislation;

The Pataki Administration has failed to investigate fully major regulatory
issues that arise with MHC reorganizations, such as potential federal bankruptcy
preemption and conflicts with federal securities law;

Under the Governor's bill, management of MHCs might face what possibly irreconciliable
conflicts of interest when trying to act on behalf of both mutual policyholders
and shareholders; and

Under the Governor's bill, in a MHC reorganization, mutual policyholders
would give up control of their companies and the right to share in 100% of
the profits of the insurer through dividends on participating policies, and,
at the same time, would be exposed to added risk. But the legislation does
not provide for any real compensation for policyholders and Securities and
Exchange Commission (SEC) regulations may hinder MHCs from sharing any future
appreciation in value that results from a MHC reorganization with policyholders.

Should the larger issues related to MHC legislation be resolved, there are
several changes that should be made prior to its consideration, including:

Require SEC-type disclosure to policyholders, give policyholders a real
voice in operating the MHC, allow policyholders to be active participants
in the review process, and provide resources to policyholders so that they
can communicate with each other and independently analyze the plan;

Require the SID to review a planned reorganization and determine that it
is "in the best interests of policyholders;"

Require at least a simple majority of policyholders eligible to vote approve
a reorganization;

Provide meaningful compensation for mutual policyholders in a MHC reorganization
and a way to share in future appreciation;

Eliminate provisions in the Governor's bill that unduly restrict access
to documents related to reorganizations and that require the posting of security
in order to challenge a MHC reorganization in court;

Impose further restrictions on management's ownership of stock and ability
to exercise stock options following a MHC reorganization;

In addition to limitations on the sale of voting stock, set limitations
on the transfer of the economic value of the reorganized insurer to the MHC,
intermediate holding companies and other affiliates; and

Strengthen the hand of the SID to empower it to take an aggressive role
in reviewing transactions by the MHC subsequent to reorganization to ensure
that they are in the policyholders' best interests.

II. BACKGROUND

New York life insurers are generally organized as either stock companies or
mutual companies. Stock companies, such as the recently demutualized Equitable
Life Assurance Society, are owned by their shareholders, managed by directors
elected by and answerable to shareholders and run by employees hired by executives
answerable to the board. Mutuals, on the other hand, are organized in a cooperative
form and managed by a board of directors elected by policyholders. With no shareholders,
mutual life insurers have a single purpose: providing quality insurance to their
member/policyholders at cost.

New York State is home to ten mutual life insurers, including some of the largest
in the world: MetLife, New York Life, The Guardian, Mutual of New York, Mutual
of America, Phoenix Home, Unity Mutual, Farmers & Traders, Columbian Mutual
and Security Mutual. Taken together, at year-end in 1996 these companies had
statutory capital (surplus) of nearly $20 billion, and over 27 million policies
in force. When the projected market value of this surplus is taken into account
based on recent demutualizations of life insurers, the value of the surplus
would probably exceed $40 billion.

Nationally, only 100 of the nation's 1,200 life insurance companies are organized
and operate as mutuals, but this handful of companies controls one-third of
the 195 million individual life insurance policies in force and the same proportion
of the industry's $346 billion in assets. The ten largest mutuals alone have
accumulated surpluses totaling almost $35 billion.

Mutual of New York (MONY) sold the first mutual life insurance policy in New
York in 1843. Some of the nation's largest mutuals, including Prudential, MetLife
and the Equitable actually began as stock companies and converted into mutual
form, at least partially in response to the Armstrong Commission investigation
in 1905. The Commission, created by the Legislature and the Governor after a
media storm surrounding scandals at several life insurers, was named after its
chairman, Senator William Armstrong, and headed by Charles Evans Hughes, who
later served as Chief Justice of the U.S. Supreme Court from 1930-1941. The
Commission found evidence of a startling number of abuses within the industry,
including illegal loans, massive political contributions, fraudulent financial
statements, self-dealing by officers and directors, lavish expenses and improper
withholding of dividends to policyholders. Many of the reform recommendations
made by the Commission were adopted and are in NYS law today. Included in this
list is the statute that allows stock companies to convert to the mutual form.

Raising Capital and Increasing Surplus - Existing Law

New York's mutuals have several ways that they can raise capital or increase
their surplus under current law. These include merger with other companies,
selling stock in downstream subsidiaries or selling subsidiaries or assets outright,
the issuance of surplus and capital notes, and selling their own stock following
a "demutualization," or conversion to stock company form.

Several mutuals have availed themselves of merger opportunities in recent years.
Unity Mutual has merged with eight other insurers since 1984. Last year, MetLife
completed a major merger with New England Life.

Both MetLife and, most recently, New York Life, have also raised capital by
selling health insurance subsidiaries.

Issuance of surplus notes is perhaps the most common way that New York's mutuals
have raised capital to date. Surplus notes are promissory notes representing
indebtedness. Insurers essentially borrow money from the purchasers of the notes,
which increases their surplus since there is no corresponding increase in liability
for statutory accounting purposes. Section 1306 of the Insurance Law governs
the issuance of surplus notes, limits the amount of surplus notes insurers can
issue, and requires the superintendent of insurance to approve issuances and
interest or principal payments. As of 1996, New York Life had almost $500 million
of surplus notes outstanding; MetLife had $1.5 billion.

In 1996, New York became the first state to authorize the issuance of a second
type of instrument, capital notes (Chapter 300 of the Laws of 1996). Section
1323 provides the new authority for life insurers to issue capital notes with
the approval of the superintendent. The net proceeds from the sale of capital
notes is includable in an insurer's total adjusted capital, but is not included
in its statutory surplus. SID approval is not required for payment of interest
or principal on capital notes, and the statute limits the amount of capital
notes that can be issued as a percentage of a company's total adjusted capital.
To date, no insurers have issued capital notes under the law.

Conversion of a mutual insurer to a stock company through full demutualization
is another way for mutual insurers to raise capital. Article 73 of the Insurance
Law sets out the process for the reorganization of insurers from mutual to stock
companies. New York's demutualization statute (Section 1312), which sets guidelines
for mutual insurers to reorganize as stock insurers, was adopted in 1988 and
was again the first such law in the nation. Under the law, demutualization plans
must be approved by 3/4 of the board of directors and submitted for SID approval.
Before the plan can be submitted to policyholders for a vote, the SID must find
that the plan: 1) demonstrates the purpose and specifies reasons for the proposed
reorganization; 2) is in the best interest of the mutual life insurer and policyholders;
3) is fair and equitable to policyholders; 4) provides for the enhancement of
the operations of the reorganized insurer; and 5) will not substantially lessen
competition in any line of business. Participating policyholders, defined as
policy owners with dividend rights, must be given the opportunity to vote on
the plan and to receive notice of a public hearing required to be held by the
superintendent. All policyholders with participating policies and contracts
in force at the time of the effective date of the reorganization are entitled
to vote to approve or reject such a plan. The standard for policyholder approval
is that 2/3 of those policyholders voting must vote in favor of the plan.

New York's law provides four options for demutualization.

Method I: 100% of the shares of the new stock entity representing the
value of the mutual insurer are distributed to policyholders, but a dilution
of the membership interest is allowed through an issuance of stock to the public.
A "closed block" of assets must be segregated and devoted to funding
the dividends of participating policyholders, although the law allows companies
to exclude certain classes of policyholders (mainly large commercial policyholders)
from the block. Significantly, this method does not require the reorganizing
entity immediately to distribute its surplus to its policyholders or sell shares
to the public in an initial public offering (IPO), but allows the company to
hold the value of the shares in trust for policyholders and distribute it to
them over a period of up to ten years. In a Method I demutualization, the company
may not pay the expenses of the reorganization from the closed block.

Method II: similar to Method I, this option relies on a calculation
of the value of the company to be distributed which excludes "orphan surplus."
Orphan surplus describes the amount of a company's surplus - essentially the
accumulated profit of the company - that has been contributed by policyholders
over a number of years, which is not distributed and is credited by the mutual
insurer to a policyholder preference account. Instead, the value of the contribution
of current policyholders to surplus is calculated and distributed to those policyholders
along with 10% of the ultimate proceeds from the IPO and preemptive subscription
rights to purchase shares to be offered in an IPO. No brokerage costs can be
charged to policyholders under this option.

Method III: limited to small mutual life insurers, this option contemplates
an acquisition of the company by a "white knight" whose price for
acquiring the mutual would essentially be the price of establishing a closed
block.

Method IV: allows a company to demutualize under any method approved
by the superintendent under which policyholders' membership interests are converted
into or exchanged for consideration that is fair and equitable to policyholders.

Under all the methods, upon a preliminary finding that the plan meets the requirements
of the statute, the superintendent is authorized to hire consultants, including
actuaries and investment advisors, who must report generally on the fairness
of the plan and the sufficiency of the closed block, but these reports are given
only to the superintendent. Following a public hearing, the superintendent must
approve the plan if it meets the standards in the statute, is fair and equitable
to policyholders, is not detrimental to the public and if the reorganized insurer
will have sufficient funds to ensure future solvency.

Eligible policyholders must then be given an opportunity to vote on the demutualization
plan in accordance with the provisions of the statute, which includes voting
by mail or in person, in the presence of inspectors. If 2/3 of the policyholders
voting support the plan, the plan is submitted to the superintendent for final
review. Lawsuits challenging a reorganization plan must be filed within the
latter of six months from the effecitive date of the plan or one year from the
date a copy of an approved plan is filed with the superintendent, and a court
may also require plaintiffs to post security in order to begin or continue litigation.
(See Attachment A for examples of recent
demutualizations.)

The Proposed Legislation

Representatives of the life insurance industry approached the Committee early
in the 1997 session, and presented us with legislation that they had prepared
authorizing the conversion of mutual life insurers to stock companies to be
controlled by newly formed mutual holding companies. Assemblyman Grannis introduced
the bill (A.7057) to provide
a document that could serve as the basis for discussion, and for soliciting
industry and consumer input. Despite repeated assurances from industry lobbyists
and executives that a revised version of the bill was in the works, the Committee
waited nearly four months for it to finally surface. Developed behind closed
doors in conjunction with the SID and the Pataki Administration, the new version
was submitted as Governor's Program Bill #71 on June 24th, 1997. A.7057
was amended to reflect the changes in the Governor's program bill. While the
revised version is similar to the original bill, there were a number of changes
and new provisions as the result of the work done by an industry/SID working
group.

A.7057-A would add
a new Article 79 to the state Insurance Law to authorize a domestic mutual life
insurer to reorganize into a domestic stock life insurer through the formation
of a new mutual life holding company (MHC) which owns, directly or through one
or more stock holding companies, at least 51% of the voting stock of the reorganized
life insurer. For the most part, the process of MHC reorganization mirrors the
current process for a demutualization under existing law. The proposed legislation
provides for the development and approval of a MHC reorganization plan by the
reorganizing insurer, submission to and review of the plan by the superintendent
of insurance, who must conduct a public hearing, and a process for policyholder
review and final approval or disapproval by the SID.

Once a MHC reorganization plan is approved, the bill contains many provisions
related to the ongoing operation of the MHC and its responsibilities, including:
1) a requirement that outside directors comprise a 2/3 majority of certain key
MHC board committees; 2) limitations on stock ownership by directors and management;
3) limitations on "non-insurance surplus" and "aggregate capital
and surplus" that may be maintained by the MHC; 4) limitations on legal
challenges to an approved MHC plan, and restrictions on access to documents
related to the plan; 5) the right of policyholders, under certain circumstances,
to purchase stock with their own funds through "subscription rights;"
6) a requirement that reorganizing insurers, under certain circumstances, establish
a "closed block" of assets or some other method of protecting policyholders'
dividend expectations after the conversion; 7) a requirement that MHCs undergo
the process for a full demutualizations when it owns less than 51% of the voting
stock of the reorganized life insurer; and 8) the applicability of existing
Article 15 Holding Company Act provisions in the Insurance Law to MHCs.

Finally, the bill contains two provisions unrelated to the MHC provisions.
The first would amend Section 4207 to relax current restrictions on the declaration
by stock life insurers of dividends to shareholders. The second provision would
reduce from 10 years to three years the actuarial projection required of an
insurer seeking approval for a full demutualization.

The legislation can be accessed by selecting "Assembly Legislative Information
System" from the menu on the NYS Assembly Home Page at http://www.assembly.state.ny.us
or by contacting the Committee office.

MHC Activity in Other Jurisdictions

To date, sixteen states and the District of Columbia have enacted various versions
of MHC legislation: California, Florida, Iowa, Louisiana, Kansas, Minnesota,
Missouri, Nebraska, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island,
Texas, Vermont and Wisconsin, although legislation has been introduced in Vermont
to significantly alter the statute enacted there. In addition to New York, MHC
bills are pending in several other states. State legislatures in Indiana and
Georgia recently adjourned for the 1998 session without approving a MHC bill.

Thus far, only five companies nationwide have converted to a MHC structure:
Pacific Mutual, the largest mutual life insurer in California prior to conversion:
AmerUs Life, an Iowa insurer; General American Life of Missouri; Acacia Life
in the District of Columbia; and Ameritas Life in Nebraska. AmerUs is the only
insurer in the group to actually issue stock and begin making acquisitions of
other companies, and General American has issued $125 million in debt. Several
additional mutual insurers domiciled in states with MHC statutes are in the
process of reorganizing. FCCI, a Florida-based workers compensation and property
& casualty carrier, recently received conditional approval on its MHC plan
from the Florida regulator.

The Iowa Insurance Department recently held a hearing on an application by
Principal Mutual, the nation's seventh largest mutual insurer, which insures
over 70,000 New Yorkers. In a January 8, 1998 letter to the Iowa insurance department,
the New York SID expressed its strong opposition to the Principal Mutual application,
deeming it not fair and equitable to New York policyholders. Citing its authority
under Section 1106 of the Insurance Law, New York officials threatened to suspend
Principal's license to operate in New York if the company proceeded with the
plan (See Attachment B).

The Hearings

Rather than attempt a hasty mark-up in the closing weeks of the 1997 session,
the Committee deferred action on A.7507-A
until after the summer recess. The Committee conducted its first hearing on
the revised MHC legislation in New York City on October 10, 1997. New York
Times reporter Joseph Treaster aptly captured the atmosphere at the packed
hearing room in his article ("Insurers' Plan to Sell Stock Riles Consumer
Advocates") the following day:

Some of the biggest insurance companies in the country squared
off against Ralph Nader and a contingent of lesser-known consumer advocates
yesterday in a committee hearing of the New York Assembly on the structure
of insurance companies. . . . Testifying under crystal chandeliers in the
marble and stone New York County Lawyers Association Building in Lower Manhattan,
Harry P. Kamen, the chairman and chief executive of the Metropolitan Life
Insurance Company, and other industry officials repeatedly contended that
a reorganization would 'provide considerable enhanced value' to policyholders
'over the long run.' But Mark Green, the New York City Public Advocate, called
the legislation, which has the strong backing of Governor George Pataki, 'one
of the most anti-consumer measures he had ever seen.' . . . And Mr. Nader
said: 'This is not about policyholder benefits. This is about investment bankers
and managers getting rich.'

Due to the extensive interest in the subject and the number of witnesses, the
hearing was continued for a second session on November 13 in Albany. In addition
to a second appearance by state Insurance Superintendent Neil Levin and First
Deputy Superintendent Greg Serio, the Albany hearing featured testimony from
Lt. Governor Elizabeth McCauhey Ross, New York Life CEO Sy Sternberg, New York-based
consumer groups NYPIRG and Citizen Action, and insurance agent organizations
(See Attachment C for a full list of
witnesses and hearing notice).

As was the case with the opening day of the hearing, the second day featured
extremely disparate opinions expressed by proponents and opponents on the wisdom
of adopting the Governor's MHC proposal. Life insurance executives and SID officials
stressed the need for MHC legislation in order to preserve the competitive position
of New York-based mutual life insurers, while consumer advocates including Citizen
Action of New York's Richard Kirsch, called the legislation "The biggest
single consumer rip-off, if this were to pass, in the state's history. Stealing
billions of dollars from millions of people."

The challenge for the Committee has been to attempt to reconcile these widely
divergent views and to make recommendations on how best to allow our domestic
mutuals to grow and prosper in a dynamic global marketplace while maintaining
New York's longstanding record of protecting the interests of policyholders
and consumers.

III.
IF THE POLICYHOLDERS DON'T OWN A MUTUAL, WHO DOES?

Shadowing every discussion of the MHC legislation was the question of who owns
a mutual insurer, a question that has been the subject of academic debate for
decades. In addition to the testimony at the hearings, the Committee reviewed
a large number of sources to research this question and found an equally large
number of opinions, including one legal scholar (J.A.C. Hetherington) who advanced
a theory in a 1969 article that management is the "de facto" owner
of a mutual and is entitled to receive its surplus upon dissolution.

Several witnesses supporting the bill asserted that mutual policyholder ownership
was essentially a fiction - claiming that customers weren't even aware of whether
their policy was from a mutual or a stock company.

For most witnesses, however, the answer to the mutual ownership question was
obvious. For Wayne Roberts, a life insurance agent for 28 years with New England
Life, the answer is found in "basic training" for life insurance agents:

Every new agent studying for the NYS licensing exam has one fact drilled into
his memory. Question: What is the difference between mutual and stock life insurance
companies? Answer: Mutual companies are owned by the policyholders to whom dividends
are paid, stock companies are owned by the stockholders to whom dividends are
paid. This is a given - never seriously questioned in the past.

Witnesses cited insurers' sales and promotional materials, which for years
have driven home the message that policyholders are indeed the owners of mutual
insurers. Who can ever forget Prudential's signature slogan, the ubiquitous
"Own a Piece of the Rock"? Lt. Governor McCaughey Ross highlighted
this ownership interest by quoting from a MetLife sales brochure:

'MetLife is one of the largest insurance companies in the world. We have no
stockholders. We're operated solely for the benefit of our policyholders. They
elect our board of directors and share in business results through dividends.'

Life insurance industry executives and regulators sought to downplay the advertising
campaigns of the past, arguing that mutual policyholders had only contractual
and membership rights. These contractual rights require the company to make
good on the terms of the insurance contract, with the membership rights entitling
some policyholders to vote in elections and to share in a distribution of proceeds
only in the event of dissolution of the company, or an insolvency.

The following exchange between Assemblymember Grannis and Superintendent Levin
focuses on the ownership question:

Assemblymember Grannis: Let
me just start off with some general concerns. In your statement you talked
about your view as to whether or not policyholders are, in fact, owners of
mutual companies. Your view is that they are not owners in the traditional
sense. If the policyholders don't own the company, who do you believe does
own a mutual company today?

Mr. Levin: I would tell you this was the same legal
debate that goes on in the world of mutuality and thrifts. We can get into
a debate on law. I think the truth of the matter is that shouldn't even be
a subject for argument because we are treating it as though it's a legal right.

Assemblymember Grannis: So, in your view, the policyholders
do own the company?

Mr. Levin: Well, again, this can be argued both ways,
and I've seen this in my experience-

Assemblymember Grannis: I'm asking for your view as
the regulator, because your view will be critically important in analyzing
these plans, should they come before you.

Mr. Levin: I will tell you that my view is that they
have a contractual relationship with the company. They have a package of rights
to elect directors, to receive surplus distribution, surplus upon liquidation,
and to have the terms of their policy adhered to. So, again, I will tell you
that they have beneficial rights, which in this case certainly line up with
their owning the mutual holding company. Mr. Chairman, let me just say the
bottom line is, without getting into the legal policy as to who owns the company,
I will tell you that it's my belief that their rights confer upon them ownership
of the mutual holding company. And I'm not trying to be evasive. It is not
a simple answer.

Assemblymember Grannis: I'm trying to find out who
you think owns the mutual before it gets to the mutual holding company.

Mr. Levin: We could say theoretically the policyholders.
The directors manage the company in the interest of the policyholders.

IV. JUSTIFICATION FOR
THE MHC BILL

Proponents of the bill made several arguments as to why adoption of MHC legislation
was important for New York's domestic mutual life insurers. They described the
blurring of the lines between banking, insurance and financial services industries,
increased global competition, the trend toward consolidation of insurers and
the economies of scale that could be realized with larger institutions, and
the problems they foresaw with making acquisitions with cash rather than stock
in an inflated market. They also pointed to actions by other states on mutual
holding company legislation, and the possibility that Congress might enact provisions
as part by the omnibus Financial Services Act (H.R. 10) which would allow New
York's domestic mutuals to move to other states unless MHC legislation is enacted.

Raising Capital and Increasing Flexibility in an Era
of Consolidation

Harry P. Kamen, chairman and CEO of MetLife, discussed the importance of the
legislation for his company:

So, why would Metlife consider changing to a mutual holding
company? Because we are in the midst of a period of such profound and rapid
economic, demographic and regulatory change that conversion to a mutual holding
company structure may well be essential in order for us to keep pace with
change and a marketplace that constantly redefines itself.

As evidence of this sea change, Mr. Kamen cited the $20 billion invested in
at least 26 consolidations and acquisitions in the insurance industry in 1996
and 1997, and the increased competition to the life insurance industry coming
from banks, mutual funds and other segments of the financial services industry
and high-tech companies.

Mr. Kamen described three recent acquisitions made by MetLife in response to
changing market conditions, and his own company's recent $16 billion merger
with New England Life. He also cited four recent transactions, ranging from
American General's acquisition of U.S. Life for $1.8 billion in stock to Aegon's
purchase of Providian's life insurance business for $3.5 billion in stock, in
which MetLife was not a player.

We would have found these prices very, very expensive on
an all-cash basis, and without stock as currency we could not even have been
at the table, since sellers often favor stocks, because it enables them to
defer capital gains taxes on the stock they are selling.

New York Life CEO Sy Sternberg discussed the same consolidation trend:

What we are concerned about is, as our competitors become
bigger their costs to operate decrease. It's simply economies of scale. Today,
we have a competitive level of expenses. But if a major consolidation takes
place, we may not have a competitive level of expenses for our policyholders
and we might not be providing our policyholders the kind of value that we
have provided for the past 152 years.

Superintendent Levin summed it up this way:

Finally, if these mutual insurers are truly handicapped -
and, you know, you don't have to take my word for it, pick up the newspaper
any day from the last three or four months and find another merger or blurring
of industry lines - we will ultimately create dinosaurs out of the mutuals
because they will be unable to grow with the times.

There were some strong dissenters, however, who challenged the need for mutuals
to have access to capital through a MHC structure.

Ralph Nader of the Center for Study of Responsive Law (CSRL) rejected the industry's
very premise:

Based on their own rationale, the mutual giants are here
today seeking greater capacity, without compensating their policyholders in
the process, so they can further consolidate their market and economic power
to further restrict competition. This is self-serving oligopolistic double-speak
if it ever existed.

One of the critical issues is this: The insurance industry
says that this new law is needed to help mutual insurance companies shore
up their financial condition. So, what is the financial condition of these
companies? The facts prove that they are not on the financial brink. And that
suggests that the real purpose of this legislation may be to allow insurance
company executives to make their own fortunes. New York Life's own annual
report suggests how suspect these claims of financial need really are. It
said: '1996 was another excellent year in an unbroken string spanning more
than 15 decades.' That year, the company paid out $1.197 billion in dividends,
plowed $579 million into its surplus account and ended the year with a whopping
$4.08 billion in surplus. This is hardly a company on the financial brink.
This is hardly a company dangerously in need of capital. The more likely rationale
for this legislation, examining carefully the provisions of the legislation,
is to permit industry executives to make their own fortunes.

Jason Adkins, director of the Massachusetts-based, non-profit Center for Insurance
Research (CIR), which has been closely monitoring MHC statutes and reorganization
plans across the country, argued that existing state law provides ample opportunities
for mutual insurers to raise needed capital:

On the mutual's claims of capital needs beyond what's available
under current law, seven of the largest life insurance companies out of ten
are mutuals. Prudential, Met Life, New York Life, among other giants, are
mutuals that have done well and expanded in the market because they've been
able to offer more competitive products than their stock competitors traditionally.
And on a risk-based capital level, mutuals now typically have higher surplus
ratios than their stock competitors. So they are better capitalized on the
standard measures than the stock companies are today.

They also have numerous capital raising mechanisms, which
include retained policyholders premiums, surplus notes and capital notes,
which were recently provided for under law last year here. Surplus growth
through mergers and acquisitions. Establishment of stock holding company subsidiaries,
of which many mutuals already have, dozens, if not hundreds of stock subsidiaries
which provide for maximum kinds of flexibility for mergers, acquisitions and
so forth by selling stock in those subsidiaries in order to raise additional
capital.

Now, that latter mechanism for raising capital has been applied
in the property and casualty context in numerous instances, most recently
by Nationwide Mutual, which raised some $524 million net of proceeds with
the sale of one of their stock subsidiaries.

Mutual insurer representatives acknowledged current capital raising options,
but asserted that they were not adequate and had disadvantages. New York Life
Senior Executive and Chief Financial Officer Howard Atkins asserted that even
if all nine of New York's mutual insurers pooled their surplus note capacity,
they could not have financed a recent $2 billion acquisition engineered by another
company using stock to make the purchase.

New York Life's Sternberg, alluding to Ms. McCaughey Ross' earlier testimony,
stated that his company could use $1 billion from its surplus in an investment
transaction, which he described as an amount worth "about half of an acquisition."
He later estimated that the company could raise another $500 million in surplus
notes. While acknowledging that the company could raise capital by selling stock
in a downstream subsidiary, he said "that's taking away a piece of the
company and at some point in time we'll run out of pieces you can carve off
the company." Ironically, in mid-March of 1998, New York Life did indeed
sell its managed care subsidiary, NYL Care, to Aetna for over $1 billion, with
the possibility for additional payments tied to NYL Care's marketplace performance.

Raising Capital through a Full Demutualization

As the debate continued on whether adoption of MHC legislation was needed to
enable mutual life insurers to raise needed capital, it became clear that the
key issue for this phase of the hearings was the mutuals' reluctance to meet
this need through a full demutualization authorized under current law.

[A] process which is cumbersome and expensive, as each individual
policyholder's interest must be calculated and a distribution of value must
be effected. This distribution could take the form of stock transfers, cash
or credits to policyowners. The cash demands placed on the insurer are great
and, further the company must embark upon a public offering in order for the
demutualization to become effective, regardless of market conditions at the
time or the converted insurer's need for additional capital beyond replacement
of cashouts. Poor market performance at the critical time would jeopardize
the success of the plan.

Superintendent Levin claimed that the current demutualization law would "undoubtedly
foreclose several of the New York mutuals from access to this method" and
would work to "shut some New York mutuals out of the demutualization process,
despite the fact that the company is otherwise a financially healthy enterprise,"
but provided no examples of the specific companies.

Several mutual life company representatives argued that full demutualization
was not an acceptable option, and that a mutual holding company reorganization,
with perhaps a full demutualization down the road, was better for policyholders.

New York Life's Atkins described what he perceived as the key disadvantages
to full demutualization:

Accessing the common stock market through a demutualization,
as has been described already, can be inefficient, which is why very few companies
to date have chosen this route. The process is time-consuming, it may distract
management from its primary task of running a company, and enormous costs
are involved in valuing and allocating policy interests in the company's surplus.
When cash or policy credits are distributed to policyholders in exchange for
liquidating their membership interests, the surplus that's available to protect
policyholders is actually diminished.

Mr. Atkins testified that he believed that MHC reorganizations would be quicker
and less costly, would allow companies to take better advantage of stock market
opportunities and would result in insurers that are "stronger and backed
by greater financial resources."

Superintendent Levin questioned whether, under a full demutualization, mutual
management would be adequately prepared for the shock of sudden entry into the
world of equity:

The bottom line is, full demutualization takes management
that may have been used to mutuality, suddenly gives them a huge capital injection
and says you are now forced to confront institutional investors and equity
analysts and deploy your capital, otherwise your share price is going to get
beaten down. I don't know if that's exactly in the best policyholders' interests.

Assemblymember Grannis: You're not confident that
they can handle themselves in the free market?

Mr. Levin: Mr. Chairman some can and some can't. What
I'm saying is, what we need is a scheme where management can go through a
strategic internal process to figure out what is in the best interest of their
policyholders. What's the strategy? Every company is not going to have the
same strategy in the marketplace. Some companies are going to want to be all
things to all people; others are going to be niche players. Others are going
to want to affiliate across industry lines.

Assemblymember Grannis then noted that New York's two demutualizations to date
- The Equitable and Farm Family Mutual Insurance Company - had resulted in financially
strong companies whose stock had appreciated dramatically since their initial
public offerings (IPOs).

Center for Insurance Research's (CIR) Jason Adkins disputed the arguments that
full demutualization was not a viable option:

We've heard that the demutualization isn't a favorable mechanism
because they'll have too much capital, no experience as stock managers, and
they won't know what to do with it. Well, I urge them to demutualize, if that's
their problem, return all the equity back to the policyholders, reserve some
for future growth potential and, as the Chairman has suggested, stagger any
releases of stock issuance to maximize favorable markets when they can, in
fact, use the equity. And, there is a limit on the amount of capital that
can be raised, because they say, well, after all, we're giving all the stock
back to the policyholders. What does that leave left in the bank? The answer,
of course, is that a demutualization is a paper transaction. Money is still
in the bank and additional money is raised through an IPO, so that nothing's
changed on that front. Now, what's different in the MHC scene? Well, number
one, the policyholder is cut out of the equation. They cut out creation of
economic value for existing policyholders, which is why we're debating this
question today. And, number two, management will remain entirely insulated
from any accountability.

Mr. Adkins then turned to a discussion of time constraints associated with
full demutualizations, asserting that either form of reorganization could take
18-24 months:

It's hard to imagine that management, board, regulatory and
policyholder deliberation can occur with fewer steps and safeguards and in
less time and with less procedural expense under the mutual holding company
scheme and there's been no attempt to provide any evidence that it will. In
fact, I would warrant an observation that it might be a breach of their fiduciary
duty to speed it up any faster. If you cut out the IPO and the distribution
of stock, as General American did when they converted in Missouri to a mutual
holding company scheme, they say it still took them one year. If you reduce
that part in the demutualization process here you're down to the same time
frame.

Addressing a possible timeline for a MHC reorganization, New York Life's Sternberg
said:

Consolidation is moving at a very rapid pace. And in the
next 12 to 24 months what today is a maybe very well may be a certain situation.
And frankly, even if you were to pass the MHC legislation within this particular
session, it will take us 12 to 24 months to move forward in that area.

Earlier, Superintendent Levin estimated the typical time frame for a demutualization
to be approximately 18 months. Mutual of New York (MONY) announced its plans
to demutualize in September 1997 and expects to complete the process in the
fourth quarter of this year, which would amount to a 15-month timeframe.

Preserving Mutuality

Aside from concerns with time, inefficiency and cost constraints, New York
Life's Sternberg also presented another rationale for adoption of MHC legislation,
arguing that full demutualization would force him to abandon the mutual form:

Now, a legitimate question that has been asked is why not
demutualization? There's been a good deal of discussion on this question at
today's session. The New York Life is a mutual company. Our culture at New
York Life is a mutual culture; it's part of our marketing strategy.That's
the way we sell products. We tell our policyholders this company is in business
for you. It's a cooperative. It's a co-op. The customers control the company
and we listen to our customers' interests. We want to continue to be able
to make that statement. We've been in existence for 152 years and my stewardship,
as the Chairman of this company, is to ensure that this company, under the
New York Life name, is there to pay the death benefits 50 years from today.
That's my primary stewardship. Our policyholders don't want to wake up and
read about some venture capital firm making a hostile bid for New York Life
Insurance Company. Control is very important to our policyholders. And mutual
holding company legislation protects that control. From our standpoint, I
want to be able to go back to our policyholders and say to them, 'You are
still in control and you will be in control. Do not lose sleep. This company
is - remains a mutual company.'

James H. Hunt of the Consumer Federation of America (CFA) addressed the industry
argument that MHC reorganizations were worthy of consideration because they
preserved mutuality. Mr. Hunt, a former Vermont Insurance Commissioner who began
his career as a life insurance actuary with a mutual, has been evaluating cash
value policies for consumers for the past 15 years. Mr. Hunt stressed the importance
of preserving mutual life insurance:

Mr. Hunt: I've spent quite
a lot of time thinking about this issue, trying to follow where the money
would go. If I can bring anything to this committee, it's to emphasize how
vital it is to preserve mutual life insurance. Mutual banks have pretty much
disappeared in recent years, but at least bank customers have some ability
to understand bank pricing. Not so with life insurance cash value policies.
What we need to preserve in the life insurance business is what Vanguard does
for the mutual fund business. We need to have someone to put pressure on the
costs and it seems to me that given the nature of life insurance, that can
only be mutual life insurance companies.

Mutual holding company legislation that fully preserves mutuality
would get my support. While demutualization arguably preserves the mutual
policyholder rights, the windfall conferred on present policyholders in companies
more than 100 years old is at least partly undeserved. Far more important,
mutuality is lost.

In trying to understand how this legislation would work,
I find it impossible to escape the conclusion that, in a MHC reorganization,
a partial demutualization would take place without compensation to policyholders.

Later, under questioning from Assemblymember John Flanagan, Mr. Hunt provided
further clarification of his position:

Assemblymember Flannagan: Mr. Hunt, I feel like I'm
hearing different viewpoints and different strategies. It sounds on the one
hand that - correct me where I'm wrong - that you believe mutuals are the
best. You have deep concerns about demutualization, and it sounds as if you
don't favor demutualization at all. Is that a fair assessment?

Mr. Hunt: I don't think so. Yes to your first point.
My plea is don't destroy the mutual insurers in this legislation because they're
so important, particularly in cash value life insurance. As for the other
question I would prefer that mutuality be preserved in its current form if
possible, which I think it is, or in mutual holding companies that are purely
mutual and are structured so as not to deprive value from the existing policyholders.
But given the choice of demutualization or the MHC bill we're discussing today
it appears to me that over the years the values can slip away from policyholders,
so I'll choose demutualization.

Assemblymember Grannis questioned both Superintendent Levin and First Deputy
Superintendent Serio as to whether the existing demutualization law was adequate
and whether they had given any consideration to seeking amendments to the law
to address problems mutual insurers had identified with its application:

Assemblyman Grannis: Let me just ask a question about
the demutualization statute we have on the books. The Department has fairly
broad authority to look at different variations of demutualization, one of
which is to let a company issue stock and hold that stock in trust until the
market conditions are favorable. Don't you have the ability within your discretionary
authority to streamline the existing law to address a number of the concerns
- excessive costs, market timing, long delays - that have been raised as to
why demutualization isn't a viable option for companies seeking to raise capital?

Mr. Serio: What we found upon our examination, is
that we can tinker with it, make small changes, and make incremental changes.
There are some things that we can do now without changing the statute, to
help the process along, and much of it is procedural in terms of how the Department
approaches a demutualization application. The problem is that since a demutualization
necessarily requires evaluation and distribution of the value of that company,
the big nub or the big issue involved in a demutualization cannot be altered.
That is the point where it takes the most time to make a determination or
evaluation, where it's the most expensive in terms of the use of outside consultants,
actuaries, attorneys and others who we will call upon to do a demutualization
process. The reality is that we cannot substantially alter that process, and
that is the real integral part of the demutualization process.

* * * * *

Assemblymember Grannis: Again, and I asked this last
time, Neil, and I'm asking it again. Have you explored the existing demutualization
law and the limits of your authority - current authority and the flexibility
that you are afforded under that law? Why that, in and of itself, doesn't
provide sufficient flexibility for the industry to make a decision as to whether
it stays as a mutual or switches to a stock company?

Mr. Levin: That's a fair question. One of the main
problems with demutualization is - and I understand that this is where the
rubber meets the road for some of the people in this room - that one of the
requirements is that there is a distribution at the point of demutualization.
What that entails is going through a lengthy and arduous process to determine
each policyholder's value in terms of the company and there has to be a distribution
at the time of demutualization. A MHC would allow policyholders to receive
100 percent ownership of the MHC without, at that point in time, identifying
what everybody's individual ownership right is. And it's difficult. You can't
get around it - that has to be done in Article 73.

H.R. 10 Redomestication Provisions

When the Committee first began considering the MHC legislation, it became apparent
that the mutual life industry had embarked on a two-course track to seek passage
of the bill: a full-court press in Albany for a state MHC statute and, at the
same time, inserting language into H.R. 10, the major federal financial services
overhaul legislation being worked on in Washington.

Committee inquiries into this activity confirmed that a handful of New York
mutuals were indeed leading the effort in Congress to insert provisions in H.R.
10 which would allow insurers to redomicile to another state without the approval
of the home state's insurance superintendent (as required by current law) in
the event that the home state did not have a "reasonable" MHC law
in place. In the current draft of H.R.10, the state insurance regulator in the
state in which an insurer is seeking to relocate would have sole discretion
to determine the adequacy of the home state's MHC law and whether minimum federal
standards had been met with regard to the plan of reorganization.

Assemblyman Grannis, in conjunction with the National Conference of State Legislatures
(NCSL) and the National Conference of Insurance Legislators (NCOIL) has been
working to oppose the redomestication provisions of H.R. 10 (See Attachment
D), largely because of concerns about federal preemption of state regulation
of insurance, an area traditionally ceded by Congress to individual states.

Despite his position as the state's preeminent insurance regulator, Superintendent
Levin stressed his belief that states should acquiesce to federal pressures:

There is, however, one externality which will impact the
state's ability to protect its consumers in the future, and it is something
which should not be ignored: the potential passage of H.R. 10. If ignored,
it will be at the risk of the millions of life policyholders of New York State
who could very well find themselves under the regulatory oversight of another
state and, certainly, not one of their choosing. Under current law, as you
know, a life company cannot redomesticate to another state without the approval
of the New York State Insurance Department. H.R.10 would allow any New York
life company to leave New York's regulatory jurisdiction and take the safety
and security of New York's policyholders with them. Where will they go? The
answer is to one of the 15 jurisdictions that presently has a MHC statute
on the books.

Superintendent Levin then closed his testimony at the Albany hearing, by claiming
that "If I were [New York mutual life insurers], I'd be doing exactly the
same thing."

On the other hand, CSRL's Nader counseled the Committee to ignore the threat
posed by H.R.10:

In reality, the new holding company proposal is an executive
self-enrichment scheme that was developed by management and their corporate
law firms, and the stock option envy that they harbor in their souls and in
their minds for so many years is leading to this national stealth campaign
to get this legislation through. And then, they threaten legislators like
you that if you don't give them what they want, they will move to Rhode Island.
Can you imagine? Metropolitan Life is going to move to Providence. Well, you
might say to them that the holding companies for Citicorp and Chase Manhattan
Bank are chartered in Delaware and the employees did not move to Delaware,
so they shouldn't give you that kind of implied blackmail with their usual
talk about incentives in other states.

Given the fact that adoption of MHC legislation in New York could, in and of
itself, perhaps open the door for insurers to redomicile their new stock life
companies (most likely incorporating in industry-friendly Delaware), it is not
clear what impact enactment of H.R. 10 would have on domestic mutual life insurers
deciding to leave or remain in New York.

Action by Other States

Witnesses in favor of the bill worried that actions by other states in adopting
MHC laws would provide an advantage for out-of-state competitors, particularly
those from bordering states. CIR's Adkins viewed this threat as minimal due
to New York's ability to intervene, as it has in the past, with regard to demutualization
applications in other domiciles for those insurers licensed in New York.

There may be 16 jurisdictions with lousy laws on the books,
but if New York sends a strong message that this bill is inappropriate for
New York citizens, New York's extraterritoriality will lead the rest of the
country because the Principal Mutual proposal in Iowa and other conversions
elsewhere will not receive the approval of New York, and that is appropriate.

In fact, SID is currently involved in negotiations concerning a problematic
MHC conversion application from Principal Life Insurance Company now under review
by the Iowa regulator. On behalf of the 70,000 New Yorkers insured by the company,
the SID has opposed Principal's application in Iowa and threatened to suspend
Principal's license to operate in the Empire State unless certain conditions
are met (See Attachment B).

V. THE
PROPOSED LEGISLATION - ISSUES AND CONCERNS

While the hearings focused on broad issues such as the overall justification
and need for a MHC bill, the viability of the demutualization option, and the
nature of mutual ownership, the Committee heard a great deal of testimony dealing
with narrower issues and specific features of the legislation, including:

the fairness of MHC reorganizations to policyholders, prospects of a dimunition
of policyholders' membership interests and the value of subscription rights;

risks to which policyholders might be exposed in MHC reorganizations, including
management conflicts of interest;

the viability of MHC governance;

the adequacy of legislative provisions purported to safeguard policyholders'
interests;

the adequacy of disclosure to policyholders;

the impact of the proposed legislation on insurance regulation, including
potential conflicts with federal bankruptcy procedures and securities regulation;
and

the limitations on potential MHC litigation.

Following are some of the highlights of these discussions.

What an MHC Reorganization Means to Policyholders

Proponents of the legislation argued that mutual policyholders might benefit
in four ways from enactment of MHC legislation: 1) membership in a financially
stronger company better able to meet its obligations and deliver products efficiently;
2) the prospect of higher dividends for participating policyholders; 3) the
ability to use subscription rights to purchase stock and share in its future
appreciation; and 4) a higher distribution in the event of a full demutualization.

It is interesting to contrast the list of asserted policyholder benefits from
MHC reorganizations advanced by the bill's supporters with the language of regulatory
approvals reorganizing companies must seek from the Securities Exchange Commission
(SEC). General American, a Missouri-based mutual life insurer sought permission
from the SEC in 1997 to not register membership interests in the MHC as securities.
In a February 14, 1997 letter to the SEC, attorneys for General American wrote:

'The third criterion under the Howey test - that there be
an expectation of profits to come from the efforts of others - is not satisfied
because the membership interests, as such, give the member nothing except
limited voting rights and such other rights as may be provided under a MHC's
Articles of Incorporation and By-laws and Missouri law. The membership interests
automatically accompany, by operation of law, the policies to which they relate.
The membership interests are not, therefore securities because the economic
reality of becoming a MHC member is that the policyholders part with their
money to purchase a commodity for personal consumption - insurance - and not
to receive profits from the efforts of others.

Furthermore, as discussed above, in the event of the dissolution
or liquidation of MHC, any surplus which remains at the time of such dissolution
or liquidation after payment of the liabilities will be distributed to the
members only as determined by the Board of Directors of MHC and as approved
by the Missouri Director of insurance. Moreover, except in the limited and
extraordinary circumstances described in the preceding sentence, no payment
of income, dividends, or any other distribution of profits will be made to
the members of MHC in their capacity as members, except as directed or approved
by the Missouri Director. Finally, because the membership interests are nontransferable
(independent of the related Policy) and remain in force only so long as the
member remains a policyholder in the Reorganized Stock Company, there is no
potential or possibility to realize profit by transferring the membership
to a third party.'

The SEC notified General American in a letter dated February 20, 1997 that
it would not take enforcement action (a "No Action" letter), because,
among other reasons, "the MHC will not be permitted to make any payments
of income, dividends, or any other distributions of profits to members of MHC
in their capacity as members, except as directed or approved by the Director
or pursuant to a dissolution or liquidation approved by the Director."

In written testimony, Professor Joseph Belth, Emeritus Professor of Insurance
at Indiana University and the recipient of a prestigious George K. Polk Award
for his publication Insurance Forum, characterized the SEC No-Action
letters this way:

Yet, in the mutual holding company reorganizations to date,
the membership interests of the policyowners have been described as essentially
worthless. I refer to the grim descriptions in the companies' requests for
no-action letters from the staff of the Securities and Exchange Commission.
In Chicago a few weeks ago, at a meeting of insurance regulators, Richard
A. Hemmings of the Chicago law firm of Lord, Bissell & Brook said that
it would be a "show stopper" if the membership interests in a mutual
holding company were deemed to be securities for the purposes of the federal
securities law.

New York Life's Atkins offered his view of the MHC structure's benefits to
mutual policyholders:

Policyholders in a mutual holding company will also directly
benefit from the greater long-term security that this capital provides. Their
companies will be stronger and their policies will be backed by greater financial
resources. When companies issue stock, the capital does not lie fallow. It
is invested in income-producing assets. It is hard to argue that additional
capital, when invested wisely, can do anything but improve the operating performance
and financial strength of the insurer. If indeed ratings may be positively
impacted the cost of insurance for current and prospective policyholders could
be reduced. The mutual holding company also represents an opportunity for
policyholders to receive financial value. The subscription rights that Dick
Dunham mentioned represent the mechanism for policyholders who are interested
in becoming shareholders, to get in on the ground floor. Before any stock
is issued, policyholders who exercise these rights get real tangible value,
since they will be offered shares at no higher that the public offering price,
and since they may benefit from any post-IPO appreciation, if indeed they
are willing to take the stock market risk and remain shareholders in the company.
In addition to their insurance policyholders' dividends, policyholders may
also stand to receive significant monetary value after new capital has been
brought into the holding company. When asked the question, are mutual holding
company members entitled to receive a distribution of the company's surplus,
the right answer is yes, but only if and when the mutual holding company and
its members determine that it is in their interest to give up their membership
rights and to convert to full public ownership through demutualization.

The New York State mutual holding company bill expressly
provides for this distribution. The only requirement is that you be a policyholder
at the time the decision to demutualize is made. This is only fair. It is
exactly the same requirement that pertains today if a mutual insurer goes
straight to public ownership. Under the New York State bill, the value that
may ultimately be distributed to members could be significantly greater than
the portion of an insurer's surplus that is distributed immediately under
an immediate demutualization. The holding company's ability to tailor the
timing and magnitude of any stock offerings could very well result in a higher
price for the majority shares owned by the mutual holding company, which may
ultimately be distributed to its policyholders than the value that would have
been established by the marketplace in an immediate demutualization. To summarize
this issue of monetary value for policyholders: policyholders get value on
the way in, in the event of subscription rights, on the way out, through a
distribution in the event that the company decides to demutualize, and in
between, policyholders gain considerable prospects for greater growth in surplus.

MetLife's Kamen told the Committee that following the merger of New England
Life and MetLife, New England's policyholders' dividends increased because they
were now part of a stronger company. He failed to note, however, that had MetLife
acquired New England Life through a MHC structure, the company would also have
obligations not just to their new policyholders, but to new stock holders as
well.

Impact on Policyholders' Membership Interests

Some Committee members and many witnesses remained unconvinced of the benefits
to policyholders of the MHC structure. Some witnesses found difficulty accepting
the idea that while the MHC could sell up to 49% of the voting stock in the
converted stock insurer, policyholders who were giving up half of their interest
in their mutual received in return, at most, only non-transferrable "subscription
rights" which would allow them to use their own funds to purchase stock
at the initial offering price.

Assemblymember Sam Colman, among others, was clearly troubled by this notion.

Mine is a very basic question. If I represented the interests
of all the mutual insurance policyholders, what you're asking me to do is
give you half of the company at no cost, without compensation. As a group,
the mutual insurance policyholders own the company today; if this goes into
effect they'll only own half of it. Can someone justify that for me, please?

SID and industry representatives argued that mutual policyholders had no right
to expect a distribution because they were not surrendering their membership
interests, which were simply being transferred to the MHC. Under the Governor's
legislation, policyholders would be given non-transferable subscription rights,
which they could elect to exercise if they chose and were financially able to
do so. After a lengthy discussion of the issue with SID officials and industry
executives, Mr. Colman was still unconvinced:

What I don't understand is, you're taking away half of my
company. You're selling it, and then the stock does well, we the mutual policyholders,
the people who used to own 100% and now own 51 percent, we don't benefit from
that at all. In a demutualization, at least if the stock doubles we all benefit.
Here, you're taking half of my company, you sell stock, and I have absolutely
no benefit from it.

What does the policyholder bring to the table? They're going
to be allowed to purchase stock, just like everybody else? Do they have a
preference? What do they bring to the table?

Mr. Reali: When we issue stock, policyholders get
a preference in buying any stock at the initial public offering, so policyholders
come to the front of the line and can buy stock if they want to be shareholders
for the additional capital that comes into their company. Whether they decide
to become shareholders or not, they do not lose anything, but if they decide
to invest in the company, they are put first in line.

Assemblymember Jacobs: But, what do they bring to
the table in the whole thing? Would it be fair to say that a fair amount of
the capital of the company was contributed by the policyholder in their premiums?
The premiums they pay?

Mr. Reali: Yes, a fair amount of the capital. A fair
amount was also contributed by policyholders who are no longer with the company.
One way to look at this reorganization, is that the policyholders are bringing
to the table all of the value of the current company and they're walking away
with all of the value of the current company.

Assemblymember Jacobs: Which is what they would have
walked away with before. But, I'm asking, why would you not want to acknowledge
or consider that - bringing what they do bring to the table - policyholders
deserve some compensation for what they are bringing? It's like bringing in
an investor who makes it possible for you to go forward and saying, 'We're
going to let you buy into that which you helped to make possible.'

Mr. Reali: The reason there is no distribution to
policyholders at this point is because we're maintaining all of the current
policyholder rights. If you were going to make a distribution, that would
reduce the value of the current policyholder rights.

Assemblymember Grannis engaged in a similar dialogue with Superintendent Levin:

To the extent that the company liquidates today, policyholders
are entitled to recover all of the retained surplus up to that point.

Mr. Levin: Yes.

Assemblymember Grannis: But under this bill if they
sell 49 percent, they are entitled to virtually nothing.

Mr. Levin: Well, they get subscription rights and
they still retain 100 percent. We have to also remember - and this is something
that's lost in the public discourse - which is when 49 percent of the insurer
or some of these intermediate holding companies is sold publicly, that cash,
that value, goes somewhere. It goes upstream to the MHC, which we just said
the policyholders own 100 percent of. So, what they are getting back, they
still own 100 percent of the MHC, they are still retaining all value in there.

It should be noted that the legislation does not require intermediate holding
companies or stock life insurers to return the proceeds from sales of stock
or pay dividends to the MHC.

Value of Subscription Rights in a MHC Reorganization

Witnesses focused on the provisions in the bill regarding subscription rights
and gave real life examples of the exercise of subscription rights in similar
transactions. In written testimony, Programs Manager Charles Bell and Insurance
Counsel Mary Griffin of Consumers Union questioned whether subscription rights
were adequate compensation for mutual policyholders:

'Instead of giving the policyholders the compensation to
which they are entitled, under the bill the policyholders will receive only
a right to buy stock in the converted mutual at a discounted rate, or "subscription
rights." This process eliminates policyholders' true equity interest
in the mutual. Rather than receiving stock or other compensation for their
ownership interests, they are given the opportunity to invest in the company.
Policyholders who either cannot afford to purchase stock or fail to understand
their options are left behind. And, even this limited right to purchase stock
is further restricted by provisions that limit their purchase rights to 50%
of the shares issued (only sold in lots of 100 or more shares) and permit
the board to deny issuance of subscription rights altogether, subject to approval
of the Superintendent.'

Based on the recent demutualizations of The Equitable and Farm Family in New
York, where stock in the two companies went on the market at $9 per share and
$16 per share, respectively, policyholders would have to ante up a minimum of
$900 to $1,600 to take advantage of their subscription rights under the Governor's
bill, since the proposed legislation sets a 100-share minimum. It is also worth
noting that any obligation to issue subscription rights may be excepted by a
2/3 vote of the stock company board and approval by the SID. Raising additional
concerns on this point, an amendment circulated by the Pataki Administration
last year would allow companies to privately place up to 49% of the voting stock
with SID approval, without granting any subscription rights to policyholders.

Insurance agent Roberts also questioned the notion that policyholders (including
himself and many of his customers) would receive adequate compensation under
the Governor's bill. He recounted his own experience as a Union Mutual policyholder
when the Maine disability insurer demutualized and reorganized as UNUM:

Back in 1954, I took out a small $200 a month disability
income policy, all I could afford at the time, with Union Mutual Life. I paid
modest premiums over the years until the policy terminated when I reached
65 in 1987. In September 1986, I received a letter and prospectus from Union
Mutual, and I quote, "Union Mutual's board of directors has unanimously
adopted a plan to convert our company from a mutual to a stock company which
will be wholly owned by UNUM Corporation. You will share in the distribution
in cash or stock of more than $650 million in Union Mutual surplus, as of
December 31st, 1985." Quote, "We believe that conversion is in the
best interest of our policyholders and Union Mutual. It will allow us to provide
eligible policyholders with an opportunity to convert their illiquid membership
interests into cash or stock while maintaining their existing policies. It
will also enable Union Mutual to raise additional capital to maintain and
enhance its market position. My share of the surplus, based upon my little
disability income policy, would result in my being given 44 shares and the
option to buy an additional 43 shares at the offering price of $28 a share.

Naturally, I was delighted at this news and purchased the
additional shares for $1,204. UNUM raised the capital it needed to expand
and strengthened its competitive position. UNUM prospered and its policyholders,
corporate executives and employees have all participated in its growth and
stock appreciation since conversion under current law.

In 1994, I sold the shares of UNUM that had been given to
me plus the shares for which I had paid $1,204 for over $9,000. If, in 1986,
the proposed mutual holding company bill
A7057 had been in effect, Union Mutual policyholders would not have received
one penny of the $650 million surplus that premium payments from people like
me had created over many years.

It would have been unconscionable then, and even more so
today, when tens of millions of mutual policyholders and many billions of
their accumulated surpluses are at risk. If Union Mutual, Equitable Life,
and now MONY policyholders were and are to be paid 100 percent of their surplus
at the time of conversion, is it not grossly unfair and discriminatory for
Metropolitan, New York Life and other mutual company policyholders to receive
nothing under A.7057? What
do we tell our clients who ask how do we benefit as policyholders when the
company doesn't pay us our share of surplus upon conversion? And don't tell
us that we will be better off in the long run.

CIR's Adkins cited the conversion of mutual savings banks as a useful predictor
of the exercise of subscription rights under the New York bill:

On June 13th, 1994, the FDIC, after being long-concerned
about how the mutual thrifts had converted, issued supplementary information
in the Federal Register on that date, observing excess insider abuse in full
conversions involving subscription rights. Now, subscription rights are one
of the issues here, so let me observe for you what they had to say about it.
Quote: 'Market participants have told us that in a typical conversion - now
that's a full conversion - less that five percent of the depositors participate
at all and the majority of them are professional or insiders.' The FDIC criticized
one particular subscription offering scheme as follows. Quote: 'All who had
their subscriptions filled were depositors, but only five percent of depositors
subscribed. We questioned whether it could be an adequate response to the
trustees' fiduciary duty to deliver that much value to that tiny fraction
of a mutual insurance institution's depositors with the capacity to line up
and collect it.'

I guess this all begs the question. Is the subscription offering
window dressing? Is it the reason why the investment bankers are all so enthusiastic
about a new frenzy of capital raising because, in fact, they can make out
as they did in thrifts? And doesn't it beg the question, what kind of standard
ought there be on a subscription offer? Is it unfair and inequitable and not
in the best interests of the policyholders if less that 90 percent participate,
or is it 80 percent or 95 percent? That's where we're headed. Let me close
by saying that now is not the time to repeat the history of thrift conversions.

CIR's Adkins also cited the example of AmerUs, the Iowa-based mutual that has
reorganized in a MHC structure and is the only company to have issued stock.

Now, under Iowa's law and regulations, which are not dissimilar
to those proposed here in this bill, AmerUs won approval for the conversion
plan by a mere 20 percent vote of the policyholders, less than 7 percent of
the policyholders received a prospectus on the stock offering that they were
entitled to through the subscription right offering, and 99.4 percent of policyholders
bought no stock under that offering. 99.4 percent of policyholders received
none of the benefit then of the 50 percent appreciation in the stock that
occurred in the next six months, with some exceptions. There were 1,800 policyholders
out of 323,000 that did buy stock, including all of senior management, all
the executives, the board members, and other insiders. They walked away with
a clean $57,000 profit on that six-month transaction.

Proponents of the MHC measure stressed repeatedly their belief that policyholders
would benefit under the new structure from both a better-capitalized company
which would provide greater security that their death benefit would be paid,
and the potential for dividend growth on participating policies. They argued
that at the same time these benefits would accrue, policholders would sacrifice
nothing. MetLife's Kamen made the point in an October 27, 1997 letter to Assemblyman
Grannis following the New York hearing:

The concern stems from the fact that the MHC would be able
to sell up to 49% of the converted life insurance company's stock to investors.
However, I can assure the Committee that this does not mean that policyholders
are giving something away, or that the shareholders get something for nothing.
Shareholders add new value by contributing new capital. The value of the policyholders'
membership interest in the company after a sale of stock is exactly what it
was beforehand. For instance, let's say that an insurance company had total
capital of $51 million "owned" by policyholders before a stock sale.
If the company then sells stock in the marketplace valued at $49 million,
the total net worth of the company is now $100 million ($51 million originally
plus $49 million from the sale of the stock). Policyholders would now "own"
51% of the company's $100 million capital base - of $51 million, the same
as where they started.

Other witnesses made the same point throughout the hearings, prompting the
following exchange between Assemblymember Grannis and MetLife's Reali:

Obviously, raising capital is one thing, but the purpose
of this whole structure is not just for raising capital, it's to allow you
to go out and buy or acquire other entities that may not be in the same field.
You can do things that are far afield. Everybody's talking about the benefits
to the policyholders, but there are risks to those investments going south
in a changed market. And the policyholders bear some considerable risk at
that point of losing this great benefit of the added capital from these outside
ventures. They stand to be at risk for virtually all of the loss, isn't that
correct? I mean, this isn't all just one way. I know we're living in a stock
market that seems to have no cap to it, but life has been tougher at other
times and probably it will be so again.

Mr. Reali: First, we should recognize that the life
insurance company will have capital requirements and so you're not going to
see money coming out of the capital of that life insurance company and endangering
that company. If additional capital is raised, and used for a stock-to-stock
merger or an acquisition, yes, these are risks. It doesn't always go up.

Assemblymember Grannis: But their dividends could
drop based on the investment in other entities. They're at risk, are they
not?

Mr. Reali: Not the policyholder dividends, because
the closed block that's required in the statute will protect the current level
of policyholders dividends. Future gains that they may have been expecting
from some of these new ventures may not materialize, but the current values
will be fully protected.

It should be noted that under the Governor's bill, however, the requirement
to establish a closed block or an alternative mechanism to protect policyholders'
dividends expectation is not operative until the MHC holds less than 75% of
the voting stock of the reorganized stock insurer.

Risks Associated With Poor Management Decisions

CIR's Adkins followed Assemblyman Grannis' concern about risk to policyholders
of management's use of new capital with a concrete example of the types of risks
that policyholders might face if management failed to invest the surplus contributed
by the company's policyholders wisely:

Policyholders' risks have been increased with AmerUs' use
of the capital they raised to acquire a Delta Insurance Company, I believe,
in Missouri, and then a subsequent acquisition, a company called AmVestors,
which was just going public in September. Moody's rated AmVestors as one grade
above investment quality. It had a B++ rating or something. And, as a result,
both S&P and Moody's have now put AmerUs, the mutual holding company,
on credit watch. S&P said that the two acquisitions, which were done very
rapidly, create negative implications, and Moody's said it's set up for a
possible downgrade in rating. What are the issues? Incompatibility of the
management in the companies that were acquired. The rapid expansion of the
company's growth and so on. So, there's a classic example, and the only case
study we have about what happens to the potential risk on the policyholder
side. It's not an academic question. When the company's solvency and rating
now become a question, it impacts directly on the policyholders' interests.
The policyholders received none of the stock and get none of the potential
upside if the stock value increases; yet they unwittingly bear the risk of
losses should the insurer make imprudent expansion decisions with its capital.

Potential for Conflicts of Interest in MHC Governance

Beyond asserting the potential for unintentional diminution of policyholders'
interests through poor management decisions, some witnesses focused on the risks
inherent in the hybrid nature of MHCs, one of the core issues confronting the
Committee. David Schiff, a former insurance broker and current publisher and
editor of Schiff's Insurance Observer, put the issue this way:

The problem with the mutual holding company concept, and
with the ensuing publicly traded downstream stock subsidiaries that will be
created, is that such a structure produces irreconcilable conflicts of interest
between the fiduciaries and the beneficiaries. In these circumstances, management
is faced with two mutually exclusive responsibilities. Providing policyholders
with insurance at the most efficient cost and providing shareholders with
the highest return on their investment. Once a mutual's executives and directors,
who are generally the executives and directors of the stock holding company
as well, become equity participants, they will be faced with an additional
conflict of interest.

On the subject of conflicts, NYC Public Advocate Mark Green and others cited
the testimony by Mr. Richard Shinn, then MetLife's CEO, at a 1978 hearing before
the U.S. Senate Judiciary Committee's Subcommittee on Citizens and Shareholders
Rights and Remedies. Mr. Schinn's written statement describes the reasoning
behind Metropolitan's decision to convert from a stock to a mutual company in
1915 following the enactment of mutualization legislation recommended by the
Armstrong Commission:

A decision was made to mutualize the company in accordance
with recently enacted provisions in the New York Insurance Law. Acting under
these provisions, the existing shares were purchased with surplus and in 1915,
Metropolitan became a mutual life insurance company. No longer would the board
be subject to the conflicting interest of shareholders and policyholders -
their primary responsibility would now be to the policyholders. According
to Bests' Insurance Reports, the terms of the mutualization were very favorable
to policyholders. . . Let me emphasize that Metropolitan's conversion to a
mutual company benefited the policyholders by insulating them from possible
attempts to raid the large pools of marketable assets, representing policy
reserves and surplus.

Mr. Schiff also discussed the tangible dangers of this conflict of interest,
based on his investigative reporting on a series of transactions involving Allied
Mutual, an Iowa-domiciled property and casualty insurer with a publicly-traded
stock subsidiary, a structure which exists under current law with some similarities
to the proposed MHC structure:

In 1985, Allied Mutual, a large, successful mutual insurance
company, sold to the public a piece of its downstream stock insurance subsidiary,
created a downstream holding company called Allied Group. For starters, it
sold it to the public below book value. Over the next nine years, eight hundred
million dollars, as of today, was transferred to the stockholders, a quarter
of a billion dollars to the managers, and the mutual company has basically
been emasculated. It makes $6 million a year. The stock company makes $52
million a year, and the mutual has been entirely sold out to the stock company.

CIR's Adkins sounded a similar warning, citing reports to investors issued
by two leading financial institutions, Morgan Stanley and Dean Witter:

How are current holding company laws going to protect the
policyholders? Illinois speaks to that, and there ought to be a serious deliberation
about whether we can risk that kind of loss of control. Investment bankers
Morgan Stanley and Dean Witter recently described to investors the benefits
of property and casualty mutual insurance companies with downstream stock
subsidiaries, a structure which parallels, but does not duplicate, that of
the proposed MHC conversion. That is a mutual will remain a mutual but it
will set up a stock subsidiary. Quote: 'One advantage is that growth can be
controlled by gradually increasing the percentage of the business received
by the stock subsidiary.' Then they give the example of the Harleysville Group
where the premiums in the stock company have grown by 13 percent annually
and the mutual has only grown by 9 percent. So there's a shift of business
towards the stock company away from the mutual. Another quote: 'Other useful
features of this structure include keeping unattractive business in the mutual
rather than in the stock company and letting the mutual absorb earnings volatility,
resulting from storm losses.' Well, I think that's a perfect reflection of
the kind of management discipline you have and how fiduciary duty obligations
are recognized in some companies, and there needs to be a protection against
exactly that kind of question.

Adequacy of Legislative Safeguards for Policyholders

Insurance industry representatives and regulators responded to these concerns
in two ways, first by seeking to highlight safeguards built into the MHC reorganization
process which they believe would prevent abuses in New York, and second, by
noting their confidence that the interests of shareholders and policyholders
would rarely, if ever, be out of alignment.

Superintendent Levin asserted repeatedly his contention that months of discussions
between his department and the mutual insurers had "yielded a bill containing
the highest level of consumer protections of any bill or law of its kind in
the nation."

Consumer advocate Nader was less sanguine about the quality of the protections
in the bill:

I love the technique that they are using on this committee.
In a stealth quick manner without a public hearing, they rammed through horrendous
bills in 15 states and then they sit back and they say, Mr. Chairman, this
proposal is better than any other bill. That's right. This proposal is only
terrible compared to the horrendous bills and they try to make you feel good
about that.

Wolcott B. Dunham, an attorney and LICONY consultant, focused on the provisions
in the bill intended to protect policyholder interests. He cited the provisions
restricting stock ownership by company officers, requirements for outside directors
on key MHC board committees, votes by supermajorities on certain key investment
decisions, and caps on the amount of surplus MHCs can accumulate. The last of
these is already a requirement for life companies, adopted as a result of the
Armstrong Commission recommendations.

Assemblymember Donna Ferrara asked CIR's Adkins to compare the bill's provisions
with MHC laws from other states. In response, Adkins, referring to the consumer-oriented
investment standards adopted by the California Public Employee Retirement System
(CALPERS), said:

The New York bill is not really that different from the Met
Life original drafts on most of the fundamentals, that is, on most of the
issues of process and most of the issues of substance. There are a few attempts
to, for example address the outside director questions, incorporating some
of the CALPERS concerns, but most of the recommendations of CALPERS don't
even appear in the New York bill. For example, wouldn't it be nice to have
only outside directors on the nomination committee for the mutual holding
company? That's not in this bill. What about the ethics and compliance committees?
All these things are addressed by CALPERS and not in this bill

Mr. Nader added:

Now to go into procedure, which I think is the tell-all and
say-all of the maneuvers here. The procedures and due process are atrocious.

Committee members and witnesses also focused on the bill's provisions dealing
with disclosure of information to policyholders, its sections dealing with participation
of policyholders in the reorganization process and in the management of MHC
and newly formed stock insurer, and its restrictions on litigation.

Adequacy of Disclosure to Policyholders

In a dialogue with MetLife's Kamen, Assemblymember Grannis worried that the
deck would be stacked against policyholders as they try to evaluate a very complex
MHC reorganization proposal:

My great concern right now is with the access to information
by your policyholders. As a mutual policyholder, or MetLife policyholder,
how would I go about being able to properly evaluate your judgement and your
recommendation to me as that a proposal for a mutual holding company would
be in my best interest? Because that's the only reason I'd consider voting
for it.

Mr. Kamen: Well, I think you would receive a copy,
maybe the whole plan or a summary of the plan, which we would go to great
pains to make clear and understandable. If appropriate, we might use our friends,
the Peanuts gang, that we use all the time to try to explain concepts in as
simple and clear a way as possible. That's the challenge in selling and marketing
life insurance and related products, so I think we've gotten pretty good at
it, and I think that the policyholder would understand basically what it's
all about.

Assemblymember Grannis: In going through the steps,
though, for your own internal analysis of whether or not it is, in fact, the
right way to go on behalf of the policyholders, obviously you'd have to employ
outside counsel, inside counsel, actuaries. You'd have to bring together a
host of professionals that would advise you.

Mr. Kamen: Well, we have very strong internal professionals
but I would assume we have brought in an opinion of counsel and maybe an independent
actuary on our analysis.

Assemblymember Grannis: I'm just a single, middle-class
policyholder in Pleasantville, New York. How do I go about matching the intellectual
input and expertise that went into your decision? How do I come up with any
ability to find out whether or not this is a good idea?

Mr. Kamen: I don't think you would have to match the
intellectual input. I think the intellectual input arrives as a result, a
financial evaluation, which can then be translated into very straightforward
language. A lot of it depends on how you structure it.

Assemblymember Grannis: Well, of course you wouldn't
have any problem giving your advocacy position on it. I have no doubt about
your ability, because you've made the decision, you and your board and your
advisors have made a decision that an MHC was the right thing to do for the
policyholders and you were presenting it in an advocacy position saying we
think this is a good idea, the smart thing to do for the following reasons.

Mr. Kamen: I think our lawyers, for one, would make
sure that we're complete and open in the disclosure. We would view that just
like an SEC disclosure. I think we wouldn't take an advocacy position. We'll
reach the decision but it wouldn't be the case of an advocate presenting one
point.

In a discussion with New York Life's Atkins and MetLife's Reali, Assemblymember
Grannis also questioned whether any planned disclosure to policyholders would
include a discussion of the alternatives considered by the company:

Do you think a policyholder has the right to know that there
are options available to the company, one of them being full demutualization?
For example, disclosing to your policyholders that a MHC reorganization is
only one of the available options, but we also have the ability to demutualize,
in which case you would receive stock in the converted company and have your
contract without paying another nickel.

Mr. Atkins: What we indeed would imagine, should we
ultimately make the decision to go down this path, and we have not made that
determination yet, is that we would clearly outline for our policyholders
the various alternative strategic paths that are open to the company, and
we'd do so in a very clear way, outlining all the risks and all the benefits
that are attendant thereto.

Assemblymember Grannis: And so you would have to go
through the process of valuing the policyholders interest in order to let
them know that here's your option, which is to receive $5,000 worth of stock
and hold onto your policy?

Mr. Atkins: Not necessarily. We've clearly explained
that that could be a possibility, but the basic point is that we want to make
sure that we are doing the right thing for our policyholders. One of the big
distinctions between this structure and all other structures that we're talking
about, at least the demutualization path, I should say, is that the policyholders
are still the primary constituent for the company.

Assemblymember Grannis: It reminds me of dealing with
my son. I say pick up your room or else, and his expression is, 'or else what?'
I mean, pick up your room is the paternalistic approach to my son, but the
negotiated approach when I'm trying to get him to do something is that there
is a balance and he's got to make a judgment, one versus the other, and he
wants to know, well, what? I don't see how a policyholder can possibly make
a fair evaluation of the merits of a mutual holding company plan if they don't
know what the 'or else' is. Is it what Equitable did, which is to demutualize
and send out a check for $270 million, or stock worth $270 million to all
the policyholders, who still have their policies in a stronger, more dynamic
company than they had prior to demutualization?

Mr. Reali: Five companies have elected to use mutual
holding company statutes since they were first passed last year. From what
I understand, not one of these five was considering a demutualization as an
option. So, prior to the passing of the mutual holding company statutes, these
companies were not looking to demutualize. The mutual holding company statute
gave them an option to remain as a mutual company, operated for the benefits
of the policyholders, while bringing in a minority interest of outside capital.
So, it's not really a choice between demutualization and going to a mutual
holding company.

It is important to note that during various discussions on policyholder disclosure
provisions in the bill, industry executives and SID officials on several occasions
emphasized that MHC reorganizations might never lead to full demutualizations.
During discussions of possible policyholder benefits of MHC reorganizations,
however, both these advocates put great emphasis on their belief that policyholders
would benefit from enhanced stock prices in the event of a full demutualization.

In a written submission, Professor Belth described the tension in MHC disclosure:

The mutual holding company concept is fundamentally flawed.
If the implications of the type of reorganization contemplated in the proposed
bill were disclosed to and understood by the policyowners of a mutual insurance
company creating a mutual holding company, most policyowners would vote against
the reorganization. On the other hand, if safeguards not contemplated in the
proposed bill were instituted to protect the ownership interests of policyowners,
prospective shareholders would be reluctant to invest in the reorganized enterprise.

It is interesting to compare the complex, hours-long testimony during the hearing
on potential risks of MHC reorganizations to policyholders, with a document
distributed to policyholders by Principal Mutual in Iowa as part of the company's
application for reorganization to a MHC. A glossy brochure with highlighted
text precedes the 56-page single-spaced document describing the application:
"To Our members," "benefits for you," "commitment to
mutuality," "increases our flexibility," and "enhance our
financial strength" are phrases that are broken out in prominent, large
type. On page 1 of the Information Statement in the main document itself, however,
is the clearest statement to be found focusing on policyholders' risks:

In the event Principal Life or one of its parent companies
were to sell stock to one or more third parties, it is possible that the interests
of such third party shareholders and the policyholders could diverge on certain
issues. Principal Mutual believes that such shareholders and policyowners
generally will have a greater commonality of interest than a potential for
conflict and will endeavor to minimize the occurrence of such conflict and
to operate the companies in the best interest of all constituencies.

Opportunities to Enhance Policyholder Participation

Several witnesses suggested that any imbalance in resources between management
and policyholders could be addressed by strengthening the hand of the policyholders
both during the reorganization process and thereafter as part of a MHC structure.
Mr. Nader, for example, proposed that policyholders be allowed to join an organization
modeled on Citizen Utility Boards and hire their own professional staff to advise
them on whether the reorganization plan is in their best interest. Mr. Nader,
NYC Public Advocate Mark Green, NYPIRG Legislative Counsel Russ Haven, Citizen
Action's Director Richard Kirsch and NYS Consumer Protection Board (CPB) Chairman
Timothy Carey suggested several interesting proposals to enable policyholders
to become more active participants in the MHC process, including:

granting policyholders the right to fully participate in the hearing process,
including the ability to present evidence and expert testimony and cross examine
witnesses;

requiring companies to provide policyholders with a complete copy of the
reorganization plan and supporting documents, and full disclosure of the risks
and benefits modeled on SEC disclosure requirements;

reserving one or more seats on the MHC board for policyholders; and

providing all policyholders with proxy votes, the right to call special
meetings and to nominate directors.

Approval Standard for MHCs

Much testimony was heard on the protections or lack thereof afforded by the
bill's provisions that would authorize a MHC reorganization plan to go into
effect with the approval of only 2/3 of the eligible policyholders actually
voting, and the requirement that the superintendent need only find the plan
"fair and equitable" to policyholders prior to approving it.

Many witnesses were skeptical about the value of provisions in the bill to
protect mutual policyholders interests in the light of the historic non-participation
by policyholders in the corporate governance of mutuals, and the historic barriers
to their active participation. Mr. Nader provided these anecdotes:

I recall reading the transcript from the Temporary National
Economic Committee hearings, those famous hearings under the Roosevelt Administration
in the late 1930's. In the transcript was submitted the following information:
A farmer in a Midwestern state, it turned out to be Iowa, sent a postcard
to one of the big mutual insurance companies in New York City, asking the
date, time and place of the annual policyholders' meeting. In response, the
company, alarmed, sent a private detective to find out what he was up to and
who was behind it. That's how rare it is for policyholders, other than company
employees, who are often there for the free lunch, to attend a mutual's annual
meeting. For example, for years the John Hancock Insurance Company annual
meeting would be in the cafeteria, and the employees who were policyholders
would come down, they'd get a free lunch and the business of constituency
ratification would be quickly dispensed with.

While no one would suggest that mutual life insurers would today hire private
investigators to track down policyholders seeking to exercise their mutual policyholder
membership rights, overall participation in mutual governance was clearly a
concern raised by many witnesses at the hearings. Assemblymember Grannis cited
figures compiled by Committee staff for recent mutual elections (See
Attachment E) in this exchange with Deputy Superintendent Serio:

On the issue of voting, we asked the mutuals in New York
what their experience had been on policyholders participation and votes, and
I was somewhat struck by the numbers that we got back. Based on most of the
information, the average number of policyholders who vote is less than one
half of one percent. In fact, the companies send out only a very limited number
of ballots, so policyholders are never even called on to vote. And the fact
is, when policyholders do vote, they can only vote 'yes' for the management-recommended
slate or 'no.' That was a form of voting that was used in Russia before Russia
broke up, a simple yes or a no. The ability to get a non-management supported
director candidate on the ballot is virtually non-existent with the impediments
that now exist on access to other policyholder names and all sorts of things.
So, I'm just concerned about this idea that somehow counting on the policyholder
approval of this process when it's achieved by two-thirds of those voting
is the way to go. If this were a shareholder action on a change of corporate
structure for a shareholder-owned company, it would be half of the shareholders
that were eligible to vote. I just wonder why the decision to settle on votes
cast. In many cases, an election could be swung by the policyholder/employees
of the various insurance companies that are making the application to reorganize.

Mr. Serio: That's a good question that has taken a
lot of our time in terms of analyzing, what it is that we can do with respect
to improving policyholder participation in the whole corporate governance
process. It is, I think as the Superintendent stated, the one piece that is
beyond our control in the MHC process - we can't require compulsory participation.

Deputy Superintendent Serio noted that some policyholders would purchase stock
and vote their shares, and that the bill required notification of policyholders
and a hearing on the plan, adding, "We've done our level best, I think,
to bring the policyholders to the question that they do have a real interest
in participating in the corporate governance process."

Recent events surrounding Mr. Schiff's efforts to gain a seat on the board
of Allied Mutual are instructive of the difficulties individuals face when seeking
to influence mutual governance. Following Mr. Schiff's nomination by a policyholder
for a seat on Allied Mutual's board, he was notified that he was duly nominated
in connection with the March 3 election. However, the packet of materials sent
to policyholders treated the election as uncontested, and did not mention the
names of the candidates, including Mr. Schiff's. The company then sent proxy
cards to over 200,000 policyholders in over 20 states, inviting them to attend
the meeting in Iowa, or alternatively, to return the proxy cards to authorize
management - the management that Mr. Schiff was challenging - to represent their
interests. Although the Iowa Insurance Commissioner ordered Allied Mutual to
afford Mr. Schiff the opportunity to communicate with Allied policyholders so
that he could "meaningfully participate in the elective process,"
the company successfully fought the order in court.

The concern about the historical lack of actual policyholder participation
in mutual insurers was heightened for Committee members and many other witnesses
by the likely introduction of shareholders into the ownership mix under a MHC.
Several witnesses urged the Committee, in light of these concerns, to raise
the 2/3 of those voting standard to at least a majority of policyholders eligible
to vote.

"Fair and Equitable" to vs. "Best Interests"
of Policyholders

The Governor's proposed legislation requires the superintendent to approve
a MHC reorganization plan upon a finding that it is "fair and equitable"
to policyholders. Discussion of the "fair and equitable" standard
included several interesting exchanges. Consumer advocates strongly recommended
the use of a "best interest" standard. Assemblymember Grannis noted
that current New York law requires the superintendent to determine that a reorganization
plan in a full demutualization meets a best interest standard before the plan
is submitted to policyholders for approval. He also cited the SID's finding
that Farm Family's plan was in the best interests of policyholders in the agency's
formal order approving the company's demutualization in 1996.

Industry representatives, however, were not entirely comfortable with applying
the "best interest" standard in the bill:

Assemblymember Grannis: Everybody has talked repeatedly
here, as did the Insurance Superintendent before you, about what is in the
best interests of the policyholders. Would you have any objection to our including
a uniform standard of what is in the best interests of policyholders? That's
what the Insurance Superintendent had to sign off on the last demutualization.
It seems to me that you keep talking about how your policyholders' best interests
seem to be and must be paramount. It is certainly paramount in my mind. What
about a best interest of the policyholder standard?

Mr. Reali: The policyholders' interests are paramount
in my mind and in the mind of my company and I believe all mutual companies.
The standard of best interest of policyholders is a bit of a vague standard.
The demutualization law uses a standard of fair and equitable. A best interest
standard would require consideration of perhaps an infinite number of options
to determine what is the best interest. I think when you're asking directors
and the Insurance Department to operate as fiduciaries, a standard that can
be tested is fair and equitable.

Assemblymember Grannis: Well, actually, the Insurance
Superintendent's opinion and decision in the latest demutualization in January
1996, I believe, found that the plan was in the best interests of Farm Family's
policyholders. So if that's the law today, you obviously couldn't object to
that being continued, since you're picking and choosing which parts of the
current law should be incorporated in the bill, is that correct?

New York Life's Sternberg deferred to others when asked the same question by
Assemblymember Grannis:

Then, you would have no problem incorporating the best interest
standard, because your sole responsibility is to look after the best interests
of your policyholders? Let me ask you - your goal right now, as the head of
New York Life, is not to be simply fair and equitable with policyholders in
your management decisions isn't that correct?

Mr. Sternberg: Look, I know there's a debate going
on right now on whether or not we use best interest or whether they use fair
and equitable. I mean, this is between lawyers in terms of what's appropriate
and what we open ourselves up to in litigation. I just am not qualified to
give - I mean, I'd be more than happy to have Dick Dunham respond to that,
but -

Assemblymember Grannis: That's the standard that you
use today, as a senior executive of New York Life, looking after the best
interests of the policyholders. Isn't that correct? I mean, you've just used
that phrase several times.

Mr. Sternberg: I used that phrase, but I did not use
the phrase in the technical sense that you're using it.

MHCs and the Alignment of Interest Theory

In addition to the procedural safeguards they see in the Governor's proposal,
proponents testified that concerns focusing on the possibilities of conflicts
of interest on the part of the newly-constituted MHC board were overstated because
the interests of the two constituencies - policyholders and shareholders - would
seldom, if ever, be at odds. This "alignment of interest" theory was
expressed by New York Life's Sternberg:

In the real world - and the real world is 99 percent of
the time - there is absolute alignment between what the mutual policyholders
want and what these outside shareholders would want. If the company grows
and prospers, the shareholder value increases, policyholder dividends increase
and most important, the stability of the company is preserved. In that 1 percent
of the time, when the shareholders - outside shareholders may want to go this
way and mutual policyholders want to go in the other direction - there's the
S-1. That's the offering document that you put out when you have a public
offering, which will clearly state that management will tilt in the direction
of the mutual policyholders. This company is owned - the majority voting control
is in the hands of our mutual policyholders, our customers, and if, in fact,
there is a conflict, we will vote in favor of the mutual policyholders. That
will be explicitly stated in any S-1.

Mr. Sternberg then cited New York Life's successful sale of 5% of a wholly-owned
stock subsidiary (Express Scripts) five years ago, as an example of the willingness
of the public to invest in a company where they had a limited or no ability
to influence management. The company's stock price has since risen from $6.50
per share to $53 a share, he said, and investors bought the stock with full
knowledge that the subsidiary would be completely controlled by the parent because
they were confident in New York Life's management. "Even if the company's
controlled by policyholders, if they're confident in the management, people
will buy the stock. And we have no intention of hiding leadership," Mr.
Sternberg concluded.

In response, Assemblymember Grannis offered another view of the "real
world."

In the mutual life company industry nobody votes. There is
no way to challenge or to get involved. There's no provision for shareholder
initiatives or votes by the policyholders on other policyholders' proposals,
there is no way for the policyholders to challenge management, other than
by a vote, yes or no, for the management recommended slate of directors. So,
the real world is the investors know that, in fact, management of a mutual
is in the hands of management which doesn't have to answer to policyholders.
And the concern I have is because this sets up an inherent conflict. Whether
you describe it in real world terms or theoretical terms, your role as the
fiduciary on behalf of the policyholders is that the surplus is held, managed
and looked after exclusively for the policyholder benefit. Which means stability
and cheap policies or efficiently priced policies, whatever the phrase is.
Shareholders, however, have a very narrow and short-term interest. They are
looking months, a year or several years down the road for returns on their
investments, and they are prepared to make judgements on your management and
on whether the value of the stock reflects the concerns that you might have.

There seems to be an inherent conflict in trying to keep
premiums down and maximizing shareholder return. And we have seen that in
other sectors of the insurance industry, particularly in the health care industry.
The way to maximize profits is you squeeze claims. You delay payments. You
challenge payouts. You question - you delay the payments and then you put
them in the bank. I mean, there are all sorts of things that have gone on
- not in your company, sir, but in the real world. I believe the investor
community knows, at this point, that they have nothing to fear from the policyholders
because there is no way, in the current climate, that policyholders can influence
your decisions, challenge your decisions, or even find out the basis for your
decisions because of the manner that mutual companies are run today. You have
annual meetings, but Met Life doesn't have an annual meeting. There are no
distributions of information, necessarily, to policyholders that have ever
involved them in the corporate life, generally, of the mutual industry.

Mr. Sternberg: Can I respond?

Assemblymember Grannis: Please do.

Mr. Sternberg: First of all, we have a much better
way for our policyholders to vote than by making us a public company. They
are our customers. They are our people who buy policies every day. They represent
our big force policyholders. If we don't provide a competitive product, they
leave.

It should be noted that there are signficant barriers to policyholders "leaving"
a company, including surrender charges, or the fact that a life insurance policyholder,
for example, may no longer be insurable.

Regulatory and Legal Issues

Proponents of the legislation noted two forces that they assert would further
protect policyholders' interests: stringent, ongoing regulation by SID, and
the ability to challenge a MHC reorganization in the courts.

Assemblymember Grannis, who chided the SID during the hearings for its failure
to consult with consumer advocates during the time they were putting together
the bill with the insurance industry, questioned whether the SID could or would
serve as an effective advocate for policyholders' interests in the MHC process.

MetLife's Reali described the type of ongoing regulatory oversight he expected
from the Insurance Department:

The fact that they may have pushed with the legislation without
a hearing does not suggest that they are going to rubber stamp mutual holding
company reorganizations without the hearing that's required by the law, and
I can assure you that the Insurance Department will take their duty seriously
and represent the policyholders' interests.

In an exchange with Assemblymember Grannis relating to the competing interests
embodied in a MHC, the SID's Serio tried to assure the Committee that the department
would act on behalf of policyholders when needed.

I don't understand this bifurcated system. We have policyholders
and shareholders in a corporate vote where a shareholder can adjust his or
her holdings by how much he purchases and how many shares he owns and the
policyholder is limited to one vote per policy - how that's balanced out in
a corporate vote where shareholders come in and 40 percent of the shareholders
vote and one-half of one percent of the policyholders vote? How is there a
balance there that is reflected in a true focus of the board on the varying
interests of the policyholders and shareholders?

Mr. Serio: That is an interest that you share with
us. That's a concern that we have with respect to the structure, and you are
going to have dual interests at hand. We're hoping that among the shareholder
interests there will be a sufficient amount of policyholders who participate
in subscription rights who have a stake in that, as independent shareholders,
as well as policyholders, number one. But number two is that you have in this
bill much more now in corporate governance, responsibility for corporate governance
oversight by the Insurance Department than you have in most other publicly-held
companies, with the exception of what the SEC might do with respect to the
transfer of shares of value. So you have, where you do not have actual policyholder
participation, active participation in the decision-making process, you have
the Insurance Department and the regulator, who steps in the shoes and represents
them, just like they have a group ownership interest.

Several witnesses testified that, due to the unique and complex structure of
newly-formed MHCs, even a conscientious regulator committed to protecting policyholders'
interests might be disabled by conflicts arising under federal laws governing
bankruptcies and securities matters.

The most thoughtful discussion of these federal issues appears in a June 13,
1997 memo, cited by several Committee members and witnesses, prepared by the
Illinois Department of Insurance as part of an ongoing review of MHC structures
conducted by the National Association of Insurance Commissioners (NAIC).

The memo includes a discussion, excerpted here, of the risk of federal bankruptcy
preemption:

In its letter of May 27, 1997, General American, a foreign
insurer which recently reorganized under an MHC statute, has argued that under
the McCarran-Ferguson Act various federal courts have found that the liquidation
or rehabilitation of "an insurance company" is at least in part
for the purpose of regulating the "business of insurance". [citing,
United States v. Fabe, 508 U.S. 491 (1993); Anshutz v. J. Ray McDermott Co.
Inc. 642.2d 94 (5th Cir.1981) ] General American therefore concludes that
control over the liquidations or receivership of a MHC under its enabling
law will rest with its domiciliary receiver as with any company engaged in
the business of insurance. General American asserts that Section 109(b)(2)
of the Bankruptcy Code itself would exclude MHCs from the protection of that
federal law, because in applying that exclusionary provision federal courts
are required to look to state law classifications to determine whether or
not a particular entity can be considered a "domestic insurance company.
[Citing, In The Matter of Estate of MedCare HMO, 998 F.2d 436 (7th Cir. 1993)]

We are not convinced by these arguments and believe that
there is substantial risk that the federal courts will consider MHCs to be
eligible for the protection of both Chapter 7 and 11 proceedings under the
Bankruptcy Code. Our doubts in this regard are based again on our experience
with the federal courts on these very issues. In the MedCare litigation, neither
the trial courts nor the reviewing courts were willing to simply call the
entity in question there "a domestic insurance company" simply because
our statutes labeled it as such.

In our view a MHC lacks this primary basis for prompting
the federal courts to accept a deferral to state regulation. It may be called
an insurance company under law, and it may be subject to liquidation by the
state; but since it has no insurance contracts, is not in the business of
accepting or spreading risks, and is not authorized under state law to issue
insurance contracts we think it unlikely that is would be denied federal bankruptcy
relief under any circumstances. This jurisdictional problem would become quite
apparent in the case of an MHC whose holdings grow over time to include intermediary
holding companies and other subsidiaries which themselves are outside the
"business of insurance" as described in Royal Drug and the cases
following it.

Some proponents have indicated that whether the bankruptcy
of a MHC or its subsidiary converted stock insurer is subject to federal bankruptcy
or state receivership is irrelevant because the outcome for policyholders/members
would be the same. We do not see this as a credible response to our concerns.
It is tantamount to saying that there is no difference between state and federal
interests.

Under most of these state laws, MHCs may share ownership
of the stock of any future intermediate companies or subsidiaries with the
public or non-policyholders. The ability of a state regulator to seize the
MHC as part of the receivership of its subsidiary converted stock company
may be called into question by any such outside shareholders as well as by
the MHCs management itself. 18, Appelman Sec. 10041. Public stockholders,
whose only interest is an MHC subsidiary will be profit driven, may well use
recourse to federal bankruptcy to preclude the forced sale of their MHC affiliated
assets to fund a converted insurer's insolvency. It is even possible that
policyholders themselves may see participation by outside shareholders as
destroying the "mutuality of interests" justifying the debtor/creditor
analysis of rights as between a mutual insurer and its insureds.

Certainly, neither state guaranty association laws nor individual
liquidation laws have been amended to specify what treatment these competing
interests are to have. At the very least these competing interests and purposes
should be considered in depth prior to adoption of this framework by the states.

In the same memorandum, the Illinois Department raises similar difficulties
with state regulation of the MHC structure, citing potential preemption by SEC
regulatory authority:

One problem with the advent of MHC legislation around the
country is that it is not uniform in its structure. Some MHC laws specifically
provide for intermediate holding companies and others do not. There is also
variation in the degree to which non-insurance activities can be the subject
of MHC investments and operations. Apparently, only Iowa's statute expressly
states that such intermediate holding companies are subject to regulation
by the Insurance Commissioner. On the face of the laws we have reviewed the
most significant degree of regulation imposed on these MHC subsidiary entities
appears to be no more than is now applicable to normal stock insurance holding
companies.

To the extent this is true, there are literally no standards
regarding the regulators' right to restrict the investment of affiliate assets
beyond the limited regulatory review for affiliated transactions and extraordinary
dividends permitted under the respective holding company laws. Most of these
statutes would provide no statutory standard for disapproval of a non-extraordinary
dividend stream which distributes income generated by the subsidiaries of
the MHC, including insurance subsidiaries inuring solely to outside or public
shareholders of any intermediate entities.

Were this to happen, it could be used to fuel a "form
over substance" argument that the "dividend" as a return of
earned premium is simply a myth maintained to justify the use of the label
"mutual" in reference to the MHC. Assuming a MHC's members cannot
receive a dividend from the MHC without incurring a tax liability, then it
may well be asserted that the policyholders of the former mutual insurer have
had their rights diminished in substantial respects by this form of reorganization.

Should MHC's structures come to include a predominance of
entities not stamped with the tradition of local public interest, there will
be substantial pressures to invoke federal law so as to preempt what state
MHC regulation as may be implemented. As we know the Insurance Holding Company
Acts of the various states were themselves preempted to the extent that they
once conflicted or were applied so as to impair the rights of corporation
and security purchasers under the Securities Exchange Act of 1934. Several
of the states which have adopted MHC legislation have included the regulation
of stock offerings in connection with a reorganization and two states include
some limitations on insider trading transactions. These provisions should
be reviewed with an eye towards minimizing the possibility of encroachment
of the federal interests in securities transactions.

We accept as a given that the SEC is currently willing to
issue no enforcement letters in connection with the initial reorganization
using the MHC method of demutualization. But we recently experienced a reversal
of the long-standing federal policy of noninvolvement regarding memberships
in Lloyds of London. We see no reason why we should lay the groundwork today
for a repeat of that experience in the years to come.

Nor do we believe that the prospects of such a reoccurrence
to be a red herring. Since 1979 there has been a continual judicial erosion
of what once believed to constitute the business of insurance. The case of
Ruocco, et al. Bateman, et al. 903 F.2D 1232,1237-1238 (9th Cir.1990) is of
particular relevance on this point.

In that case, the court, held, in light of the test laid
down in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48 (1987), that a California
statute which regulated the distribution of mutual insurer dividends did not
in fact regulate the business of insurance, since it did not "transfer
or spread the policyholders' risk but rather dealt with the administration
of certain policy surplus." Moreover the court concluded that although
the "premium surplus" may have been held by the mutual insurer making
the distribution in issue, it was not "owned" by the company. [Ruocco.
903 F. 2d at 1238.] While the case may, or may not, have been decided correctly
in so far as the equities under the facts presented were concerned, it must
at least put state regulators on notice that the way in which we view insurance
transactions regarding company reorganizations, control over mutual company
assets and their regulation is very different than that held by the federal
judiciary.

In a May 28, 1997 memorandum to the NAIC urging the creation of a working group
on this issue, then Maine Insurance Superintendent Brian Atchison raised similar
concerns, excerpted here:

Certain interested parties believe these laws pose a threat
to policyholders in two ways. First, any debt issued by the intermediate [MHC]
would probably not be subordinate to policyholders' obligations of the former
mutual insurance company in the event of its insolvency. Second, assuming
stock were issued by the intermediate holding company, it is unclear whether
the profits or losses and the surplus of the entire holding company organization
would be divided into two portions - one for the exclusive benefit of the
policyholders and one for the new shareholders of the intermediate holding
company. The potential exists for the policyholders to shoulder all losses
while the profits go to the intermediate holding company.

In addition, such laws may result in reduced regulatory authority
because a state insurance regulator may not have the authority to disapprove
of the issuance of the debt or the opportunity to disapprove of the dividends
for debt service. If the dividends were "extraordinary," which may
not be the case here, then there would be regulatory involvement.

The MHC laws also raise substantial issues of potential conflict
between federal laws and state jurisdictions over the business of insurance.
For instance many of these statutes make the MHC subject to liquidation by
the insurance commissioner under state law upon either its own delinquency
or that of the new converted stock insurer in which case its assets are to
be considered part of the estate of the insolvent converted stock insurer.
This liquidation scenario would likely be unavailable should any MHC or MHC
creditor seek to avoid state receivership by contesting the applicability
of the insurance exemption clause of the Federal Bankruptcy Code. (See,
In the matter of MedCare HMO, 998 F.2d 436 [7th Cir. 1993) for a discussion
of the meaning of the insurance exemption under federal statute.) The federal
bankruptcy priorities and those under state receivership laws do not treat
policyholders' claims the same.

Perhaps, more importantly, there is a concern as to the treatment
that will be given to policyholders' interests in the MHCs themselves. Recently,
the SEC issued an advisory opinion on the status of policyholder interests
in a MHC. The ruling held that the SEC would not recommend any enforcement
action against the MHC reorganization under certain conditions but it did
not waive any jurisdiction over any aspect of the reorganization. After past
experience with the SEC in regards to Lloyds of London, regulators must be
concerned of Federal preemption.

Many of these regulatory issues were raised at the hearings. Assemblymember
Grannis led Deputy Superintendent Serio through the following exchange regarding
the possibility of federal bankruptcy preemption:

There have been concerns raised by Duff and Phelps, Moody's,
the Insurance Commissioner of Illinois, the Insurance Commissioner of Maine,
and others about the loss of jurisdictional control over these companies under
federal bankruptcy laws, under the SEC, under the Internal Revenue Service
provisions dealing with dividends from a mutual, as opposed to dividends from
a mutual holding company, and possibly federal anti-trust laws. What is in
the bill that addresses any of those jurisdictional concerns? Isn't it a real
risk to New York policyholders that federal regulators, however they may find
their niche, might decide to step in and override our laws to the detriment
of our policyholders?

Mr. Serio: As an issue of principle, I think that
the statutory construction preserves New York's jurisdictional oversight over
both the mutual holding company, as well as the intermediate stock holding
company, as well as the stock insurer because of the exchange of assets. There
are some questions raised in the State of Illinois regarding the transfer
of risk, but I think we still consider these both by statute and legislative
intent that these are to be insurance entities regulated by the Insurance
Department. To that extent, and with the operation of McCarron-Ferguson, it
is our belief that these will be considered to be insurance entities that
come under the Insurance Law rather than other statutes. That being said,
I think that there's a certain reality in hand, however, that the bankruptcy
courts are exercising a certain amount of independence and a bit of forthrightness
if you will, one that we experienced not too long ago. We had a Texas company
that was related to a New York company that is currently in liquidation.

The Bankruptcy Court in Texas has taken control of that company.
That's not supposed to happen, but it does, and we will deal with it, now
in the bankruptcy context as well as in the liquidation context. Are we going
to challenge that bankruptcy court judge on his jurisdiction? It may come
to that, but the reality is that the Bankruptcy Court is a good business court.
They understand the realities of business, and the fact of the matter is,
whether we're operating under liquidation, under bankruptcy, or in tandem,
I believe that the policyholders' interest are going to be protected regardless
of the forum in which some of those issues, regarding liquidation and insolvency
are resolved.

Assemblymember Grannis: Have you received any or asked
for any legal analysis of any of those concerns?

Mr. Serio: Currently there is a working group at the
NAIC that is dealing with the question of the bankruptcy per se. We have considered
the question internally and we will look at what the working group comes up
with as well. We sit on that working group, as well, and we have pushed that
working group, not to create a model law, and give us yet another thing to
evaluate, but to look at the critical issues, like the bankruptcy question,
and to report back to us as soon as possible, and I believe we're on a December
date, December 15th date, to have the report on the issues that surround and
that underlie the Mutual Holding Company discussion. So that could be a service
and a document for you to utilize, as well as for us to clarify some of these
issues.

Assemblymember Grannis: In putting together the bill,
then, you had no legal analysis to guide you? Are we to count on a wish and
a hope from your department that federal bankruptcy laws won't jeopardize
policyholder interests in the event of a liquidation or an insolvency?

Mr. Serio: I suppose we didn't look at the question
of the bankruptcy court jeopardizing anything per se. The reality is, we did
not look at that question specifically, and we're doing that through the context
of this working group.

Following Mr. Serio's testimony at the New York hearing, LICONY's consultant,
attorney Wolcott Dunham noted that California regulators had attempted to address
the difficult issue of bankruptcy preemption by requiring that the holding company
for Pacific Mutual, the reorganizing life insurer, enter into a perfected security
interest with the new stock life insurer, thus guaranteeing the regulator's
ability to "reach up" into the holding company to satisfy policyholder
claims in the event of an insolvency. The MHC legislation proposed in New York
does not currently require such agreements as part of a plan of reorganization.

The Albany hearing featured a similar discussion of SEC preemption between Assemblymember
Grannis and Superintendent Levin relating to limitations in the bill on the
purchase of shares by officers and directors of the reorganizing company:

The Federal Securities Act has a provision in it that says
that no law or rules of any political subdivision shall directly or indirectly
prohibit, limit or impose conditions based on the merits of such offering.
To the extent that there are limits proposed in this bill, won't those run
afoul of the Securities Act prohibitions on state law seeking to get limitations
on stock offerings?

Mr. Levin: Those rules have held up in the past. There
is no reason --

Assemblymember Grannis: What rules have held up in
the past?

Mr. Levin: With regard to state limitations. I mean,
we've looked at this. It's our belief that there is no reason why there is
going to be a challenge here.

Assemblymember Grannis: There's only been one company
that has issued stock under a mutual holding company reorganization that I'm
aware of, and there's hardly been much of a track record to find out what
the regulator's position is, including any proposed limitations on the sale
of stock to the corporate directors or -

Mr. Levin: Well, I would tell you again, I mean, neither
one of us is a judge and we're not going to issue a declaratory judgement
here, but I would tell you that having looked at the law, that this is going
to hold up.

Later in his testimony, Superintendent Levin raised the possibility of regulators
requiring management to sign agreements voluntarily which restricted their purchase
of stock during a designated black-out period.

MHCs in the Courts

There was extended discussion during the hearings over the prospects of class
action challenges to MHC reorganizations and the impact of the bill on legal
challenges by policyholders. Such suits were brought challenging the MHC reorganization
of Ameritas in Nebraska and Provident in Pennsylvania. More are likely to follow.
In a recent issue of Insurance Accountant, class-action attorney Melvyn
Weiss, who, along with others, has achieved prominence recently with aggressive
litigation regarding market conduct abuses by life insurers such as Prudential,
New York Life, MetLife and others, predicted MHC litigation on behalf of classes
of mutual policyholders.

Perhaps with an eye on such future litigation, the bill contains several provisions
related to the conduct of such lawsuits. One section imposes a 120-day limit
on Article 78 proceedings to challenge SID's approval of a reorganization plan,
and an 18-month limit on subsequent judicial review. Another section requires
SID to shield all documents it receives related to a MHC reorganization from
public view, presumably even from the company's own policyholders, thereby preventing
disclosure under the state's Freedom of Information Law (FOIL, NYS Executive
Law, Article 6). A third provision allows an insurer in the process or having
completed a reorganization to petition a court to require a plaintiff to post
security in order to begin or continue the litigation.

These provisions came under attack from many witnesses.

Mr. Nader: Now, what could
possibly justify this New York legislation that imposes an 18-month time limit
on judicial review, 120-day limit on review of departmental rulemaking and
permits insurers to seek a security bond from a plaintiff - check that one
out - which in a multi-billion dollar corporate transaction will clearly impose
impossible financial barriers on policyholders who want to go to court. This
bill is designed to shut the courtroom door on policyholders. By the way,
would insurers ever in their litigation rights agree to such limitations?
Good heavens, you'd have every major corporate law firm descending on this
building, they'd be hanging from the rafters in opposition.

Indiana University's Professor Belth was also critical of FOIL limitations
in his written testimony:

Section 7922 of the New York bill would override New York's
Freedom of Information Law by requiring confidential treatment of everything
filed with the New York Insurance Department in connection with the proposed
reorganization. The only exception would be information that the superintendent
of insurance determines should be disclosed to allow policyowners to evaluate
the reorganization.

There is no need for a confidentiality provision in the MHC
bill, because the Freedom of Information Law contains exemptions for proprietary
information and other material that should be withheld from disclosure. If
a company, in connection with a reorganization, files material that does not
fit under one of the exemptions, the material should be available to the public
in accordance with the spirit of the Freedom of Information Law.

In response to questions regarding these provisions by Assemblyman Grannis,
particularly those seeking to extend the scope of New York's Freedom of Information
Law, SID officials talked of striking a balance:

The proposed changes in the Freedom of Information Law would
further restrict access to information by the policyholders that now own the
company which is filing the plan for reorganization. Why aren't the current
standards in the Freedom of Information Law regarding confidentiality of proprietary
information sufficient and what is the justification for adding FOIL - further
FOIL limitations only in regard to these MHC conversions?

Mr. Levin: I'm going to let Greg answer that.

Mr. Serio: The question pertains to the fact that we're trying
to clarify, actually, rather than an attempt to simply limit what the FOIL
rights are. An MHC is a going concern. You do not have a termination, if you
will, of the relationship with the policyholder and the company. This was
done with an eye towards the types of questions and the types of inquiries
and the demands that we get for information at the department. And it has
been difficult, up to this point in time, in terms of determining what should
be released, because the FOIL request we typically get on any one of a number
of transactions usually asks for absolutely every piece of paper that comes
into the department.

Assemblymember Grannis: But, you have protection which
the state lives with in every other context, including yours, on what can
and can't be foiled, and yet in trying to clarify this one case, it seems
that there is an effort to distinguish these kinds of conversions from all
the other work that your agency does and that other agencies do. That effort,
you know, that lead to FOIL was obviously a great collective effort of all
of the parties to try to come up with a bill that protected -

Mr. Serio: Because what we're dealing with here is
an existing company that will remain intact after the transaction is completed.

Assemblymember Grannis: As will a demutualization.

Mr. Serio: Well, except that there you do have the
final termination of interest. You do not have a going concern at the end
of the day with a demutualization in that form. I think one of the concerns
here is that we do not put the company, and the policyholder is still owning
the company, at a competitive disadvantage by having the information that
would typically go out in a demutualization go out, in this case, where it
could potentially harm the company. The problem - the challenge here - is
that the policyholders' interest is still intact and that's still something
that we have to watch for.

Now, there's the question between that and providing the
policyholders with the most information possible, and in that regard we are
evaluating the question of how much information should go to the policyholders
in terms of the plan. And the bill is rather specific as to what information
does go to them. But, that is the challenge of not compromising the integrity
of the company, since the policyholders' interest is still intact at the end
of the day or at the completion of that transaction.

Assemblymember Grannis: With regard to the ability
to seek legal review of these plans, the bill includes a provision for the
posting of security by policyholders seeking to challenge a plan. I'm not
aware that is a requirement elsewhere. It seems to me that if you take into
account the financing of a MHC, this it makes it a - well, while it looks
sort of benign on its face, the requirement for posting of security, it's
not left to the discretion of the court, it's a mandatory requirement, it
seems to me, so onerous as to effectively preclude the ability of policyholders
to step in and challenge these proceedings. What was the thinking? I mean,
I can understand why the industry wanted that, but given your role as protectors
of the policyholders' interests, why is this included in the Governor's bill?

Mr. Levin: This is something I haven't looked at in
a couple of months. My memory, and I'd be happy to be corrected, was we went
down that path trying to find a way where we could facilitate dissident policyholders
having the right to have their communications transmitted, but to also have
some discipline so that there was not an abuse of the right to do that. So,
while we were very sensitive to wanting to allow dissident policyholders to
be able to challenge management, we recognized that it was critical that they
get access to the other policyholders. We also recognized that the customer
list was proprietary and you couldn't simply just give it out. And that is
one of the ways, I think, that we set a baseline to make sure somebody was
serious and that the company was not going to be burdened, constantly, with
having to distribute communications.

Assemblymember Grannis: I think that there are sufficient
protections in the law to avoid, I think, disruptive and frivolous law suits.
But, this type of provision doesn't exist in the demutualization law, to my
recollection, for policyholders challenging management and questioning the
ability to sign off on plans for a full demutualization. It seems to me inappropriate,
if, in fact, the policyholders' interests are paramount, to impose a wall
to policyholders that may have a concern, who don't have access to other policyholders
names. To mount a challenge, short of a full shareholder derivative type action,
in which they could come into court and make a case that management, in fact,
did not represent their interests.

Mr. Levin: My sense is that we didn't think we were
putting up a wall. That we, in fact, anticipated that we were trying to empower
the policyholders to have a way to communicate with other policyholders. As
I said before, there was not going to be a distribution of the customer list.
That's just, you know, that's confidential, we can't expect any company to
give it out. That we were trying to set some framework so that you did not
have frivolous communications. The goal was to empower policyholders, certainly
not to, overall, limit them. But, to balance out the companies' needs to not
be burdened versus the policyholders' potential need to have distributions.

Assemblymember Grannis: If, in fact, the policyholders' interests
are paramount, it would seem to me that it would be proper role to do more
rather than less to provide them with the ability to look at one of these
plans, figure out whether it's good or bad for them, communicate among themselves
to decide whether or not there was going to be some effort to mount a challenge
to one of these. I mean, you're up against a Met Life - I don't know that
their annual income is, in the billions - they have teams of lawyers and other
professionals who've been looking at this for a year, two years. The policyholder
gets a plan in the mail and is asked to vote in just 30 days. Some may be
lawyers looking to make a buck on this, but most will be people that don't
have the resources, the sophistication or the ability to determine whether
this is good or bad in 30 days or even six months.

Mr. Levin: Let me just say that the powers and the
benefits given to the policyholders here, in terms of their voting rights,
clearly are improved over what's in Article 73, with regard to full demutualization.
Again while I hear what you're saying, we're happy to take a look at it, but
I think we ought to step back and say that we've already required the companies
to do a distribution explaining to policyholders what their rights are, what
the significance is of the transaction. We have required that it be submitted
to us, so we can make certain that it is, you know, not in legalese, it's
something that policyholders can understand. We also anticipated a need for
them to communicate with others; so, we've already gone down this path.

We have a need to make certain that we balance out policyholders'
rights to have full knowledge and to be empowered and enfranchised versus
the need to make sure that we don't turn this into a class-action festival
- that certainly doesn't serve the policyholders' interest.

VI. FINDINGS

Members of the Committee listened intently to the testimony presented at the
hearing, reviewed written submissions and carefully weighed the competing viewpoints
expressed by the various parties. As a result of this review, a number of strong
reservations regarding enactment of the Governor's proposed MHC legislation
(A.7057-A) surfaced. These reservations
focus chiefly on the difficulty of regulating these new hybrid entities, the
quality of disclosure required to be given and the fairness of the process overall
to mutual policyholders, whether MHCs can fairly and responsibly serve two masters
- shareholders and policyholders - with potentially different interests and
objectives and whether changes in New York's existing laws governing demutualizations
can address the industry's concerns with access to the capital markets without
depriving policyholders of their rights. Among the findings:

1. Access to Capital. Mutual life insurers at this time appear to have
adequate access to capital, but may at some point need to raise larger sums
than can now be accessed under current law short of full demutualization. While
the trend of consolidations in the insurance market may not be entirely beneficial
to consumers in that it decreases choices, it appears to be a legitimate source
of concern for life industry executives. Their desire to use stock as currency
for acquisitions is therefore understandable.

It is troubling, however, that not a single life insurer has used the authority
granted them in 1996 to issue capital notes. LICONY, in a memorandum in support
of the 1996 legislation, declared: "The bill provides domestic life companies
with controlled flexibility to create a stable, diversified capital structure
which will allow them to compete in the next century." Insurance industry
executives provided no explanation of this failure to utilize this statutory
authority.

Representatives of mutual life insurers also cited increased flexibility as
a rationale for enacting the MHC legislation, but this appears to be driven
mainly by the prospect of future bank/insurer affiliations, authority which
neither the federal nor state governments have yet provided.

2. Full Demutualization. Demutualization as a preferable option to MHC
legislation has not been sufficiently explored by either the mutual life industry
or SID. No compelling evidence was presented that demutualizations by nature
are significantly more time-consuming or more costly than MHC reorganizations.
Time and cost appear to be more directly related to the size and complexity
of individual transactions. Both MHC reorganizations and demutualizations require
significant internal review and planning, the hiring of actuarial and legal
experts to develop a plan acceptable to the SID, mailings and notifications
to and approval by policyholders, public hearings, and the development of a
closed block or an alternative method of guaranteeing policyholder dividend
expectations. While neither a full demutualization nor a MHC reorganization
requires an immediate IPO, nor any IPO at all for that matter, public stock
offerings are likely under both reorganization scenarios.

The chief procedural difference between a MHC reorganization and a full demutualization
appears to be in the time and work needed to calculate individual policyholder's
interest in the surplus and its actual distribution to the company's policyholders.
Since mutual life insurers perform at least part of this calculation annually
in determining policyholders' dividends, it would appear that at least some
of this task is completed routinely each year. Some observers believe this calculation
could serve as the model for a distribution under a full demutualization. In
fact, that was the course undertaken in the recent demutualization of an Australian
mutual life insurer. Clearly, some effort should be made to streamline and simplify
the process of valuing and allocating surplus.

While mutual insurers would obviously prefer to avoid the "cost"
of distributing their company's accumulated surplus to their policyholders,
this does not represent a compelling argument against a full demutualization.
In fact, were a full demutualization to occur subsequent to a MHC reorganization,
as several industry executives testified was a possibility, an interim MHC reorganization
would be a substantial and unnecessary cost burden for policyholders to bear.

Other objections raised by proponents to full demutualization - the possibility
of having to go to the market with an IPO when conditions are unfavorable or
having to "lug around too much capital," in the words of Superintendent
Levin - can be addressed under existing law. A Method I demutualization allows
the reorganizing insurer to place the shares representing the value of the surplus
in trust, rather than making an immediate distribution to policyholders or immediately
offering stock to the public. A Method IV demutualization gives the superintendent
broad authority to let a demutualizing insurer tailor its plan to meet its particular
needs or concerns. Mutual of New York (MONY) recently structured an agreement
which functions almost as an "insurance policy" against market uncertainties.
The company's press release announcing the agreement states:

Under the agreement, MONY issued $115 million of 15-year,
9.5% surplus notes to the investment funds affiliated with Goldman, Sachs
& Co., as well as warrants providing the investment funds with the opportunity
to purchase a minority interest of 7% of the common stock of MONY upon its
conversion to stock form. In addition, following demutualization, MONY has
an option to draw upon an additional $100 million of capital from the investor
group through the issuance of non-voting convertible preferred stock. MONY
does not currently expect that it will exercise its option to issue the convertible
preferred stock, but the contingent capital commitment would allow MONY to
have additional capital access, particularly in the event it does not complete
an initial public offering of stock in connection with its demutualization.

Overall, the rash of recent demutualization announcements and applications
in the U.S., Canada and abroad raises the question, 'If demutualization is too
time-consuming, costly, inefficient and impractical, why are so many companies
doing it'?

A serious dialogue is needed on ways to improve New York's existing demutualization
law to meet mutual insurers' capital needs in a way that is fair to and in the
best interests of policyholders.

3. Mutual Ownership. Testimony of various witnesses who sought to cast
mutual policyholders' ownership in terms of only contractual rights and the
right to a distribution in the event of a liquidation or dissolution was not
persuasive. The cumulative effect of these pronouncements is essentially to
argue that at different points in time, mutuals have no owners, a position that
was appropriately rejected by the courts nearly 100 years ago:

[U]nless all the policy holders at a given moment in equity own the corporate
property, then we have the extraordinary spectacle of a corporation, without
members, without stockholders, a legal fiction, an abstract idea, owning absolutely
all corporate property, in trust for no one, with responsibility to no one except
creditors and then only to pay debts. This conception of a legal fiction as
an absolute owner is not sound. Living persons must be ultimate owners of all
corporate property. In a mutual company that can be none other than the policyholders.
Young v. Equitable Life Assur. Soc'y of the United States, 32 Misc. 347,
350, 99 N.Y.S. 446, 454 (N.Y. Sup. Ct.), aff'd 101 N.Y.S. 1150 (3rd Dep't 1906).

Rather than embracing some witnesses' newly-minted notion of non-ownership,
the Committee adopts a common-sense approach to the ownership question - policyholders
are the company's owners. This conclusion is based on the long history of representations
mutual life insurers have made to their policyholders and the universally acknowledged
understanding of the duty of mutuals to provide insurance to their members at
cost and annually divide any profits among its members in the form of dividends.
This approach has guided past demutualizations in New York, and is at the heart
of the recently-announced demutualization plans announced by both MONY and Prudential,
and affirmed during the hearings by several prominent mutual company executives
in response to questions from the panel. While mutual policyholders' membership
interests are often illiquid and may not bear all the earmarks of traditional
ownership, New York State should maintain its longstanding commitment to fully
protect the millions of mutual policyholders, including senior citizens, pensioners
and young working families, whose interests could be adversely affected by conversions
to MHC structures.

4. The SID and the MHC Concept. It was apparent from both their prepared
statements and responses to questions from the panel that SID had failed to
fully investigate major regulatory issues associated with MHC reorganizations.
The SID, and the Pataki Administration, appear to have rushed to embrace the
MHC concept before carefully analyzing the potential impact on fundamental insurance
regulatory duties, most notably issues relating to solvency protection and the
difficulty of regulating these complex, new entities in the future. For example,
the New York hearing featured the admission by a SID official that the department
had not specifically explored federal bankruptcy preemption issues prior to
drafting A.7057-A, but had only begun to address it post-hoc as part
of an NAIC working group. There also appears to be a legitimate question of
whether the anti-enrichment provisions in the Governor's bill will run afoul
of securities laws. These issues should have been explored and put to rest before
advancing the bill. While proponents stress the pressing need for hasty action
on the legislation due to the rapidly changing business environment, a newly
formed MHC - or state regulators - paralyzed by litigation or federal preemption
represents a significant and unacceptable risk for policyholders.

5. The MHC Bill's Impact on Policyholders. Many witnesses expressed
reservations regarding the viability of MHCs as long-term corporate entities
and their ability to adequately protect policyholders' financial interests on
a continuing basis in these new structures. Many of these concerns appear to
be valid.

Conflicts of Interest

First, newly formed MHCs will have to contend with the substantial likelihood
of potentially irreconcilable conflicts of interest. The duty of a mutual company's
management is to provide insurance to its member/owners at the lowest possible
cost. Stock companies' primary obligations, however, are to their shareholder/owners.
Most observers agree that stockholder pressures force publicly held companies
to focus more heavily on short-term objectives impacting stock price and investor
returns, while mutual insurers tend to concentrate on longer-term objectives.
It is not clear how management in a company structure in which ownership is
split between policyholders and stockholders can reconcile these divergent and
quite possibly conflicting responsibilities. These concerns were heightened
by the off-hand assurance offered during questioning that, "most of the
time, there will not be a conflict between policyholders and members, and when
there is, we'll try and resolve it in favor of policyholders." For MHC
legislation to go forward, mutual policyholders deserve ironclad assurances
that their company will not lose sight of their primary mission as it relates
to their continued participation: insurance for members at cost.

Governance of Mutual Life Insurers

The concern about conflicts is exacerbated by the fact that policyholder participation
in mutual governance is virtually nonexistent. Mutual policyholders have no
real ability to remove unresponsive management, nominate their own directors,
or secure independent information as to how the company is being run. As a result
of the focus on this issue during our review, it may well be time to take a
fresh look at mutual governance - with or without action on MHC legislation.
The addition of shareholders to the ownership mix dramatically heightens this
concern. Purported protections associated with reliance on outside directors,
super majorities, etc. are meaningless without active policyholder involvement
and oversight - or at least the realistic opportunity for such involvement.
It is not sufficient, as some proponents suggested, to simply tell policyholders
that if they are dissatisfied with management they can "vote with their
feet" by switching to another company. Mutual policyholders should not
have to "demutualize themselves" to vote against management. Surrender
charges and questions about insurability would prove to be strong disincentives
to policyholders who sought to switch companies.

Management Accountability in a MHC Structure

While the MHC structure maintains de facto management insulation from mutual
policyholders as described above, it also shields management from the discipline
demanded by the equity markets. While one life insurance executive praised the
MHC bill because it "puts us in the middle," the structure also puts
management in the middle, out of the reach of both shareholders and policyholders.
The jury is still out on whether the structure gives MHC management a significant
competitive advantage over stock insurance companies, as critics have suggested,
but it is troubling that proponents of MHC reorganization will be positioned
to raise capital in order to acquire other companies without the risk of being
acquired themselves. Industry proponents argue, in effect, that they deserve
this special franchise due to their pledge to preserve true mutuality, but the
legislation provides no guarantee that mutual policyholders' interests will
prevail.

Finally, there are a number of "nitty-gritty" issues that arise from
MHC legislation that did not receive much attention during the hearings, but
are nevertheless nettlesome. For example, mutual policyholders' membership interests
are to be transferred to the MHC when the mutual life insurer reorganizes as
a stock company. But purchasers of policies from the new stock insurer, which
may be participating or non-participating policies, also receive membership
rights in the new MHC, even though they never had a relationship with the mutual
insurer. While it doesn't seem fair to mutual policyholders to grant new stock
policyholders full membership interests, to fail to do so would be to create
an illegal "tontine" in which ownership would become increasingly
concentrated in the hands of a declining number of surviving policyholders.
In the event a MHC fully demutualizes, one would assume it would have to calculate
the allocation for old mutual policyholders differently than for new stock company
policyholders, adding more complexity to an already complex actuarial exercise.

6. Potential Dimunition of Policyholders' Membership Interests. After
sorting through conflicting testimony, it appears that there is a substantial
risk that mutual policyholders' membership interests could be diminished under
a MHC structure. As many witnesses argued, the reality of MHC reorganizations
is that they are in fact "partial demutualizations," distinguished
only by the absence of any compensation to policyholders.

Subscription Rights

Several committee members were clearly troubled by a MHC's ability to sell
up to 49% of the voting stock and transfer an unlimited amount of the economic
value of the reorganized insurer while providing, at most, only non-transferable
subscription rights to existing policyholders. As Assemblymember Jacobs noted,
the new stock company is in effect "selling" a stake of the surplus
that has been contributed by its policyholders over many years. But policyholders
without financial resources or investor sophistication will not be able to take
advantage of subscription rights, even if they are in fact offered. Experience
has shown that corporate officers and directors and other "insiders"
may be the only true beneficiaries of subscription rights

Arguments by proponents that mutual policyholders would benefit from holding
policies secured by a stronger company, and that, in the event of a subsequent
full demutualization, the policyholders' distributions would be enhanced by
the added capital brought into and invested by the company were also unpersuasive.
Nothing in the bill requires that additional capital raised must be earmarked
for the benefit of the stock life insurer or its policyholders. It is noteworthy
that no MHC advocate argued that policyholders' interests are in any way in
immediate jeopardy absent passage of a MHC bill. In fact, the latest annual
reports issued by New York's largest mutual life insurers focus on their "record-breaking"
results, and their unprecedented growth and company strength.

With regard to the prospects of a full demutualization following reorganization
as an MHC, proponents of the MHC legislation sought to have it both ways. In
discussions about whether companies should disclose that full demutualization
was an option, mutual executives argued that a full demutualization may not
ever be considered. During discussions on the benefits of MHC reorganizations
to policyholders, however, MHC proponents argued that policyholders would benefit
from a higher value in the stock they would receive following a full demutualization.
It seems clear, however, that during this "interim" period, policyholders
will be asked to place their shares of the company's surplus "in trust"
with the MHC's management with no certainty that anything of value will ever
be returned, due to the failure to demutualize, or in the event a policyholder
dies or cashes in a policy.

Policyholders' Ability to Benefit From Management's Use of New Capital

It is also worrisome that the unique and complex structure of MHCs appears
to effectively prevent, or at least diminish the possibility, that mutual policyholders
will share in any increased value "upstreamed" from the stock insurer
to the MHC, even if management does achieve its goals and invests new capital
wisely. Federal securities law and regulation, which is an area of law that
will most assuredly continue to evolve, sharply limit a MHC's ability to make
distributions to mutual policyholders. SEC "No-Action" letters describe
MHC membership interests as essentially worthless. And while the proposed legislation
places some limitations on the amount of surplus that a MHC can build up, which
can be waived by the superintendent, the capital may never make it beyond one
or more intermediate holding companies in the new structure, which do not appear
to have the same limits on surplus accumulation as do MHCs under the bill.

Based on this analysis, it seems likely that mutual policyholders' will not
receive adequate compensation under the Governor's MHC proposal and do not appear
to be able to share in any post-reorganization appreciation or dividends which
may accrue to the company's stockholders. In addition to the SEC issues, there
is a danger cited by Professor Belth and others that closed blocks established
to provide policyholder dividend protection may well "wall off" policyholder
from sharing in any post-reorganization growth. On this point, the SID's January
8, 1998 letter (See Exhibit B)
challenging the MHC application in Iowa by the Principal Life Insurance Company,
excerpted below, is striking and would appear to have direct bearing on concerns
expressed with the Governor's bill:

The Reorganization Plan's provision for the establishment
of a closed block as of the effective date of the Reorganization Plan may
be detrimental to New York policyholders subject to the closed block. Among
the Department's concerns is that, although the closed block provides certain
downside dividend protection for policyholders, it limits the extent to which
such policyholders would share in any potential increase in policy dividends
after the implementation of the Reorganization Plan.

Risks to Mutual Life Policyholders

While there appears to be little tangible benefit to mutual policyholders in
a MHC reorganization, there appear to be substantial number of risks. Bill proponents
point to the closed block as protecting policyholders from risk, but companies
have great leeway in structuring closed blocks or alternatives, which in any
event are not required under the Governor's bill until more than 25% of the
voting stock is sold. But even a fair and effective closed block may not adequately
protect policyholders.

On the most basic level, policyholders, who currently are entitled to receive
100% of their mutual company's divisible surplus in dividends and are entitled
to have the company run solely for their benefit, could risk having this distribution
diminished when shareholders are introduced to the ownership mix. Insurers have
a great deal of discretion in calculating dividends, such as how they allocate
expenses, and the formulas they use in making these computations are shielded
from public view. The Governor's bill would not prohibit reorganized insurers
from waiving dividends owed to the MHC for the stock it owns on behalf of policyholders.
MHC directors may not be capable of reaching down through the MHC structure,
quite possibly through one or more intermediate holding companies, and influencing
management of the new stock life insurer on behalf of the MHC members, when
the stock company's management has a clear fiduciary duty to its stockholders.
It must be remembered that the stock in the new insurer is owned by the MHC
and not by the mutual policyholders.

New York Life's Sternberg sought to dismiss this risk, noting that his company
paid over $1 billion in dividends to policyholders last year, but would hypothetically
pay less than $45 million in dividends to shareholders on the sale of a 20%
stake in the company. This is not small change to most people. Paraphrasing
the words of Illinois' late, oft-quoted U.S. Senator, Everett M. Dirksen: "A
million here, a million there, and pretty soon you're talking about real money."

Technical flaws in the bill, and the weakened regulatory scheme that would
result, may also needlessly increase risks for mutual policyholders. For example,
while the bill caps outsider ownership at 49% of the voting stock, no
limits are placed on the transfer of the assets or economic value of the company,
which may take the form of preferred stock, convertible debentures, reallocation
of fees, transfer of business or the issuance of debt or other financial instruments.

Policyholders also would appear to be exposed to additional risk based on how
successful management is in investing the capital it raises. While our domestic
mutual insurers appear to be well run today, there can be no assurance that
management will not put mutual policyholders at undue risk with the vastly expanded
business opportunities that will be possible under a MHC structure. In fact,
Superintendent Levin raised this as a concern with full demutualization. A review
of recent merger and acquisition activity suggests that this is more than just
an academic concern. A recent monumental financial blooper from the non-insurance
world highlights this concern. Food giant Quaker Oats' "can't go wrong"
$1.7 billion investment in Snapple went terribly wrong. Less than three years
after it purchased it, Quaker Oats' sold the beverage company in early 1997,
for just $300 million after an aggressive national marketing strategy failed
miserably.

Describing the Quaker/Snapple acquisition in a March 29, 1997 New York Times
article, Charles V. Bagli wrote:

The Quaker Oats Company's $1.4 billion debacle with Snapple
only proves that the well-trod merger road has been paved with unrealized
synergies and executive hubris, experts in mergers and acquisitions say. The
oatmeal king is in good company when it comes to hailing an acquisition as
a quick and brilliant way to increase earnings, only to see it collapses amid
red ink and clashing corporate cultures. It has happened to corporate giants
and high-technology start-ups alike, including I.B.M. Xerox, General Motors,
SONY, General Electric and Novell.

In the article, several analysts note that problems often crop up with mergers
or acquisition of even related businesses, because management is focused on
legal and financial considerations, as opposed to cultural differences in how
the two companies are operated. As a result, over one half of the mergers and
acquisitions undertaken during the past ten years failed to create increased
value for shareholders of the acquiring companies, according to one analyst.

This type of deal gone wrong could have a number of deleterious impacts on
mutual policyholders in a MHC structure. Ratings of the stock insurer could
be decreased, sales of new policies could slow as the result of a loss of public
confidence, the company's ability to raise new capital might be compromised,
and there could be solvency concerns. Had the company fully demutualized prior
to the transaction, however, the mutual policyholder would have received stock,
cash or policy credits. New policyholder/shareholders could decide for themselves
whether to bet on management or invest their funds elsewhere. In a MHC reorganization
under the Governor's proposal, members would be virtual captives of their current
management.

Protections Afforded by the Holding Company Act

SID officials and the bill's supporters saw adequate safeguards for policyholders
in the limitation on the amount of surplus a MHC can accumulate, limits on the
growth of the MHC to less than the size of the stock life insurer, and regulation
of the MHC through the existing Holding Company Act (Article 15 of the Insurance
Law). Nevertheless, reservations persist. On one level, there are the theoretical
questions, such as can SID regulate a MHC as an insurer - even though that entity
is not in the insurance business - simply by calling it an insurer. But there
are a number of other practical considerations related to the implementation
of the Holding Company Act.

First, it is not clear that SID will have authority to review transactions
between an intermediate holding company and a non-insurer affiliate. This was
one of the concerns raised by state Consumer Protection Board Executive Director
Timothy Carey, who cited his experience with mutual holding company structures
involving public utilities. On its face, Article 15 appears to be limited to
transactions to which the controlled insurer "is a party." And even
in those circumstances, the SID's prior approval is required only when the transaction
involves five percent or more of the insurers' admitted assets at last year-end.
For transactions between a domestic controlled insurer and the holding company
involving from one-half of one percent to five percent of admitted assets (or
other "material transactions" specified by regulation) the MHC or
insurer must simply provide the SID with 30 days' notice.

Given the size of some of New York's mutual companies (New York Life and MetLife
have, respectively, $78 billion and $188 billion in assets) these limitations
would seem to enable a number of very sizable transactions to occur without
appearing on the SID's regulatory radar screen. And there appears to be a legitimate
question as to whether the SID will have the resources to effectively monitor
and regulate the large, complex, quite possibly international, MHC affiliates
and subsidiaries that could develop under this proposal, particularly when some
of these entities may have nothing to do with the business of insurance.

VII. RECOMMENDATIONS

Should these larger issues related to the MHC legislation be resolved, there
are a number of ways that the legislation would need to be amended before being
brought up for consideration.

1. Compensation for Mutual Policyholders. Mutual policyholders appear
to give up valuable rights during a MHC reorganization under the Governor's
bill, particularly from the moment stock is issued, and may be exposed to greater
risks by the process. Policyholders should therefore receive real, tangible
compensation of some kind for agreeing to the termination of their membership
in their mutual insurer and the establishment of a new and quite different membership
interest in the MHC. Mutual policyholders should also be given the opportunity
to share in post-merger market appreciation in the value of the entity. CFA's
Hunt suggested the use of transferable subscription rights; MetLife's Kamen
discussed the possibility that his company might offer a special policyholder
dividend. Others suggested that mutual insurers endeavor to sell stock on behalf
of those unable to exercise subscription rights, and forward the proceeds to
those policyholders. The SID raised the possibility of closed-block enhancements
as part of the Principal Mutual deal.

2. Protecting Policyholders' Membership Interests and Value. Given the
apparent risks to policyholders in a MHC reorganization, great care should be
taken to preserve their membership interests and their stake in the surplus
of the reorganized insurer and affiliates. MHC management should not be allowed
to waive dividends owed to the MHC. The proposed legislation should limit not
just the sale of voting stock, but also transfers of assets or the economic
value of the company, including but not limited to preferred stock, convertible
debentures, reallocation of fees, transfer of business, pledges of collateral,
issuance of debt or other financial instruments.

One way to accomplish this ongoing oversight would be through conditional MHC
approvals. The Missouri Insurance Department's conditional approval of the General
American MHC reorganization recognizes that while a MHC reorganization, in and
of itself, might not place policyholders' membership interests in jeopardy,
subsequent actions by the MHC, such as issuing stock or debt, are a different
matter. An order conditionally approving the General American reorganization
gives the Missouri Insurance Director broad authority to monitor ongoing activity
of the MHC.

Under the order, the General American Mutual Holding Company (GAMHC) and other
members in the group are prohibited from commencing "any sale, exchange,
transfer, acquisition, compensation plan, ownership plan, or other change of
ownership of stock or of securities of any kind convertible into or exchangeable
or excerciseable for stock in any member of the GAMHC Group" unless it
has received the prior approval of the Missouri Director. The order also requires
GAMCH to submit a plan detailing how "any accumulation or prospective earnings,
cash and/or other nonoperating assets by GAMHC" shall inure to the exclusive
benefit of the policyholders. The order notes that statutory changes are required
before GAMHC can own less than all of the shares of the reorganized life insurer,
and places strict limits on debt issues by any member of the GAMHC Group.

The incorporation of authority for this type of conditional approval, as well
as close, post-reorganization scrutiny would add an important layer of additional
protections for New York policyholders, so long as federal preemption issues
do not arise.

3. Policyholder Participation. The non-participation of policyholders
in the management of mutual insurers is well documented and deeply troubling.
In the April 1998 issue of The Insurance Forum, Professor Joseph Belth
details just how difficult it is for policyholders to nominate candidates for
the board. At MetLife, for example, an individual must obtain the signatures
of 25 policyholders on a petition simply to get a hearing on nomination issues
at the SID. Second, through this hearing process, a member must convince SID
to give them access to the policyholder list. Third, the individual must obtain
the signatures of 1/10 of one percent of the policyholders - 12,000 signatures
alone at MetLife.

As long as the corporate entity is a true mutual, with the sole duty of providing
insurance to policyholders at cost, the risk to policyholders is less of a concern.
But once public shareholders are introduced into the ownership mix, with all
their attendant rights under the Business Corporation Law and federal securities
law, the level of risk to policyholders is very different. Since preservation
of the policyholders' membership interests depends on how the board of the MHC
votes policyholders' voting stock, policyholders must be given an actual say
in selecting that company's board and influencing its decisions, closely paralleling
if not fully duplicating the rights of the company's outside shareholders. There
are a number of ways policyholders could be empowered in the MHC structure,
including enhancing their ability to nominate directors, reserving one or more
seats for them on the MHC board and prohibiting management which owns stock
in the reorganized insurer from voting policyholders' proxies.

4. Standard for Plan Approval. The proposed legislation would authorize
a MHC reorganization plan approved by only two-thirds of policyholders actually
voting. In the recent reorganization of Iowa's AmerUs, only 20% of the company's
policyholders in fact took part. Although over 93% of those voting approved
of its plan, only 24% of Principal Mutual's policyholders took part. This threshhold
is far too low, particularly given the fact that many eligible voters might
well be employees of the insurer seeking approval of the plan or otherwise connected
to entities with a vested interested in the transaction. A higher standard would
encourage reorganizing insurers to educate their policyholders about the benefits
of their proposal, as a way of encouraging participation in the process and
support for management's decision. At the very least, a majority of eligible
policyholder voters should be required to approve the plan. Some thought should
also be given to excluding company management, employees and other insiders
with a vested interest from voting on the same basis as unaffiliated policyholders.

5. Fair and Equitable vs. In the Best Interests. The Governor's bill
requires the superintendent to find that an MHC reorganization is "fair
and equitable" to policyholders in order to approve it. After hours of
testimony from mutual insurers and SID officials arguing that MHC reorganizations
were in fact in their policyholders' best interests, the Committee believes
that there is no reason why this standard should not apply to MHC reorganizations
in the regulatory process. Further bolstering this recommendation is the SID's
finding in Farm Family's 1996 demutualization that "A plan of conversion
and reorganization to demutualize [Farm Family] and position it as a stock insurance
company subsidiary of a holding company is fair and equitable to, and in
the best interests of, the Company's policyholders [emphasis added]."

6. Adequacy of Disclosure. Based on the testimony and a sampling of
information distributed to policyholders in MHC reorganizations in other states,
the Committee finds the disclosure standards in the Governor's bill are woefully
inadequate. Based on a review of material submitted in MHC reorganizations,
policyholders currently receive basically little more than promotional campaign
materials prepared by the reorganizing insurer. There is little in the way of
a thorough discussion of the risks to the policyholder, or options that the
company considered, including its reasons for pursuing a MHC reorganization
rather than a full demutualization.

Particularly before, but also during and after a MHC reorganization, mutual
policyholders should receive the same type of disclosure as that required for
prospective purchasers of shares in the new stock company as well as regular
annual disclosure statements - full-blown, SEC-type disclosure would appear
to be justified. The risks and potential benefits of MHC reorganizations, as
well as any alternatives available to management, should be clearly set out
in policyholder disclosure documents. Reorganizing companies should also be
required to post electronically their plans and other relevant documents via
the Internet.

7. Support for Policyholders Facing a MHC Reorganization. Along similar
lines, the deck is clearly stacked against a policyholder facing a decision
on whether to support a MHC reorganization. The reorganizing insurer brings
huge resources to the process and an army of legal, actuarial and investment
banking consultants, pays for consultants hired by the state regulator, negotiates
with the state regulator behind closed doors, and only after months or possibly
years of painstaking analysis and preparation, presents its plan to policyholders.
Policyholders, on the other hand, open their mail one day, and with no advance
warning, are given a mere 30 days to analyze the plan and decide whether to
accept or reject it. And this has to be done for most members without any forum
for discussion with other policyholders and absent any mechanism for even finding
out who they are.

In his April 1998 issue of Insurance Forum, Professor Belth illustrates
the difficulties policyholders face in the MHC reorganization process. A policyholder
of the Pennsylvania-domiciled Provident Mutual Life Insurance Company, Professor
Belth was recently notified of the company's plans to reorganize as a MHC. Professor
Belth submitted a statement opposing the plan to the Pennsylvania Department,
along with a one-page, "camera ready" letter to this fellow policyholders,
asking the agency to direct Provident to include the letter in mailings to policyholders.
The agency refused Professor Belth's request, stating their concern that it
would require them in the future to honor similar requests from all policyholders.
Professor Belth then made the same request of Provident management, which also
refused. Most recently, Professor Belth requested that the company distribute
his letter to all policyholders within a 50-mile radius of the site of the April
7 hearing on the reorganization, offering to pay all expenses associated with
the mailing. Provident had not responded to Professor Belth when this report
went to press.

Given the enormous amounts of policyholder funds spent by companies on the
MHC process, it seems reasonable to require reorganizing insurers to provide
information and set aside funds to enable policyholders to communicate among
themselves, hire their own experts to carefully review the plan and advise them
on its merits. It is clear that policyholders need and are certainly entitled
to have both adequate resources and far more than 30 days for this process.

8. Freedom of Information Law. There was no compelling testimony justifying
the inclusion of added restrictions on access to information under the state's
Freedom of Information Law. It is believed that current law adequately shields
any proprietary information that would be contained in a MHC filing.

9. Restrictions on Legal Challenges. Provisions in the bill which attempt
to discourage legitimate legal challenges by calling for litigants to post security
as a condition for proceeding in court should be eliminated. Given the billions
of policyholders' dollars at stake in these transactions and the inherent difficulty
for individual policyholders to join in mounting an effective challenge to a
company's plan, the conclusion is inescapable that a security requirement of
this type will function as an effective bar to legal challenges of MHC reorganizations.
Unlike a full demutualization, in which policyholders receive their fair distributive
share in stock, cash or other compensation to do with as they wish, policyholders
in a MHC reorganization stand to gain nothing in return for the sale of nearly
half of their interest to outside investors, and for that reason have more at
stake than in the case of a full demutualization

10. Restrictions on Stock Company Dividends. The NYS Public Service
Commission (PSC) requirement, supported at the hearing by the CPB's Carey, that
new stock insurers under MHCs should be barred from paying dividends to its
shareholders unless management meets specified performance standards related
to their treatment of mutual policyholders certainly is deserving of consideration.

11. Self-Enrichment. While the Committee was unpersuaded by the volume
of testimony we received that MHC proponents were motivated solely by the desire
for stock options in the new MHC, this does represent a risk to mutual policyholders.
There does appear to be a significant discrepancy between the compensation of
mutual executives and their stock company counterparts. While the Governor's
bill sets out limitations on the ownership of voting stock and stock options
by MHC management, directors and employee stock options plans, given the sheer
size of many of the state's mutual insurers, there exists the potential for
substantial management self-enrichment.

To avoid both the appearance and potential for such opportunities to encroach
on sound management decisions and diminish resources that would otherwise be
devoted to policyholders, the limit on the amount of stock that can be held
directly and beneficially should be tightened and the length of the blackout
or no-buy period following a successful MHC reorganization should be extended.
Also under consideration would be the possibility of linking the amount of stock
management could own to the amount of stock policyholders purchase through subscription
rights.

12. MHCs as a Step Towards Full Demutualization. The idea of enacting
legislation authorizing the MHC structure as a temporary phase during a process
of full demutualization within a set time-frame has been advanced by a group
of stock life companies as an alternative to MHC legislation. This structure
would allow reorganizing mutual insurers to spend some time in "spring
training" before plunging into the "big leagues" and allow reorganizing
insurers some leeway to time their entry into the market when conditions are
favorable. While this idea is worth exploring, care would have to be taken to
ensure that a two-phase reorganization doesn't needlessly squander surplus belonging
to policyholders.